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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: Czechsinthemail who wrote (12316)2/21/1998 11:48:00 AM
From: Chuzzlewit  Read Replies (4) of 95453
 
Baird, the analysts are in general useless for several reasons, but the most important one, I believe, is that they are not truly independent. There are two forces at work here. The first is that they base their "analysis" on information provided and predigested by management. Management in turn, is motivated by the fear of shareholder lawsuits. If the company doesn't execute according to expectations there will almost certainly be a lawsuit initiated. As a result, "surprises" are much more common than either "no surprise" or disappointments". This has given rise to "whisper numbers" as a cottage industry.

The second reason I believe the analysts are useless is that their operation is not independent of their underwriting arm. When is the last time you saw an analyst rate a stock as a strong sell? All the brokerages want the business, and the fastest way to alienate a potential client is to tell shareholders to avoid his shares.

Malkiel in "A Random Walk Down Wall Street" also suggests that the analysts are just plain inept.

Another point that you raised had to do with cash vs. profit. This is a very important point. Profit is a fiction invented by accountants, as is mainly useful in figuring out how much tax to pay, but even there the divergence between the profit as reported in annual reports and the profit reported to the IRS is frequently different, and gives rise to the asset item "deferred income taxes". While this frequently reflects timing differences in expense recognition, it could also be due to recognizing less than legitimate revenues. That is a major reason why financial analysts like to watch cash flow.

Regards,

Paul
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