As to our opinion on analysts
Special to TheStreet.com
7/21/98 10:50 AM ET
Momma, please don't let your son or daughter grow up to be
a securities analyst.
So who are the analysts? Who are these axes that TSC
writes up? What kind of job is that, recommending a stock
and then getting quoted every day in The Wall Street Journal
or The New York Times? Can't any monkey do that?
Actually, a few monkeys do, but not just anyone can do it
well. A great analyst is worth her weight in gold, to investors,
to the companies analyzed -- and, yes, even to investment
bankers.
I have had the privilege of working and competing with some
of the best analysts on Wall Street. Some are great
stock-pickers -- and some have never made anyone a dime.
Others are great industry sources, and some haven't a clue
about their industry's products. Most analysts, sadly, follow
companies by analyzing what has happened. Only the very
best try to figure out what will happen, and look beyond the
obvious.
The game is not to make you money, whether you are an
individual, an institution, a day trader or a long-term investor.
An analyst can help you make money, but you have to do
the work. And a little insight into what makes analysts tick
may help you harness their strengths to your needs.
Let's start with the basics. I'll be honest: There are
absolutely no qualifications whatsoever for an analyst job.
There are very few analyst training programs, and no obvious
ways to get a job as an analyst. Most people are in the job
by accident. (I know I was.) Originally, research departments
at brokerage firms were set up to help clients pick stocks
that went up and avoid stocks that went down. Pure and
simple. Of course, like all good things, that mission has
been bastardized over the years, so that today, though it
may be crucial to you, picking stocks is one of the least
important tasks for an analyst.
Most analysts today got their jobs because they:
Showed the interviewer a top-flight MBA to prove how
smart they are;
Served as an assistant to an existing analyst; or, in the
rare case,
Collected knowledge and experience in an industry they
now cover.
I am not passing judgment: Each of the above backgrounds
has produced analysts great and mediocre.
Most big firms have analysts covering all the major
industries. But until the 1970s, there was no formal ranking
of the Street's many analysts. That's when Institutional
Investor magazine came up with a quirky poll called the All
American Research Analyst poll. Every May, II sends
polls to hundreds of buy-side firms, from Fidelity to the
State of Wisconsin Investment Board, asking recipients
to rank the top three analysts in each industry sector. The
results are published in the October issue, by industry
segment. It's a big victory to get ranked in II, the holy grail,
and big brokerage firms love to brag that they have a highly
ranked research department. Lo and behold, most research
departments began hiring analysts to cover "II slots." Supply
and demand notwithstanding, prices for analysts ranked high
on the II scale keep going up.
In my early days as a semiconductor analyst, I was on a
marketing trip to Texas. I finished up meeting with a client at
5:30, and it turns out we were going to the same restaurant
for dinner. He was having dinner with the No. 3 coal analyst
from Merrill Lynch. My client introduced me to this guy,
who seemed very nice, but was actually just a young pup
like myself. I was both impressed and a little depressed,
because in my industry, there were dozens of analysts, so
being No. 3 was hot. I got back to my office in New York the
next day, did a little checking, and sure enough, there were
only three coal analysts on Wall Street.
The first thing an analyst should do is immerse himself in
the industry. He will need to know every company, their
products and services, management, issues, quirks, gossip,
everything. Company visits, conferences, trade shows,
industry rags -- the good analyst devours anything and
everything related to the field. From that, the analyst gains a
reasonable judgment of the fundamentals of the industry and
develops a coherent strategy on how to invest in the
industry. Thus armed, the analyst is ready to recommend a
few stocks to buy, a few to avoid. So easy, right?
Wrong. For the reality of the analyst's job has more to do
with becoming popular among industry CEOs and buy-side
analysts than with finding undervalued stocks, as I learned
from my partner, who used to be a client of mine when he
was at J.P. Morgan. One day in the middle of a meeting he
paused, looked me in the eye and said, "You realize, you
are not in the analysis business, you are in the
entertainment business." Damn. That hurt, but he was right.
It's that stupid II poll. Get ranked. Get votes from the buy
side. There is no correlation between being right on stocks
and getting votes. There is no correlation between providing
great investment advice and generating more business for
your firm. Even if there was, some salesman or trader would
get credit. As an analyst, your only hope for recognition is to
be ranked by II, to show up in a silly magazine once a year
in October. (Actually, the October timing is fortuitous.
Because Wall Street bonuses are calculated in December,
you might as well peak in the fall. No use doing good stuff in
February -- no one will remember it!)
The only logical connection between an analyst's II ranking
and her success is the investment banking business.
Investment bankers can land competitive and highly
sought-after IPOs and other financings by dragging in their
II-ranked analyst. The bankers promise the analyst will cover
the company, write great reports, recommend the stocks if
warranted (note: it is always warranted) and attach the
analyst's great name to the stock, which must be worth at
least an extra five to 10 multiple points (bankers will promise
anything to get a piece of business).
Do the math yourself: Since companies coming public pay
7% of the offering's value, and trading stocks pays 3-5 cents
per share, an analyst's role as deal bait has come to
outweigh all the other job functions combined. And you
thought it was about picking great stocks!
Next week, Analyst Marketing 101: The trick is to get
ranked. How to get votes -- so you get the check.
Andy Kessler is a partner at Velocity Capital, and runs a
technology and communications fund out of Palo Alto, Calif.
This column is not meant as a solicitation for transactions;
it is instead meant to provide insight into the methods of
venture capital, technology and investing. Under no
circumstances does the information in this column represent
a recommen |
