The situation was similar for Josephine Esquivel, the apparel analyst at
Morgan Stanley Dean Witter who covers fashion house Donna Karan
International. Morgan had been the lead underwriter for Karan's $24-a-share
IPO, and Esquivel issued the obligatory ''strong buy'' recommendation a
month later and reiterated it several more times. But Karan's stock started to
slide within weeks of the IPO--an embarrassment for the underwriters--as the
company ran up huge expenses and large losses. In March, 1997, Karan
hired Morgan Stanley to unload its beauty-products business. That was
tantamount to a gag order, says the analyst. ''I couldn't even change my
rating or even an earnings estimate,'' she says. Esquivel was prohibited from
commenting on Donna Karan for 15 months.
For unbiased evaluations, institutional investors look beyond the major Wall
Street firms. Big investors often give high marks to the research efforts of
Sanford C. Bernstein & Co., which does no investment banking. They also
turn to research boutiques like Lipton's or DuPasquier, the firm with which
Glazer is affiliated. ''I'm a dinosaur,'' says Glazer, who, with 30 years of Wall
Street experience, remembers the days when equity analysis and investment
banking were distinctly different functions.
St. Louis-based A.G. Edwards & Sons get high marks for solid research, in
part because it's not a major investment bank. ''Putting a sell on a stock is not
pretty for me or for the company,'' says Edwards' recreation-industry analyst
Timothy Conder, who in mid-July issued an unambiguous sell on Callaway
Golf Co. ''But I'll do it if it's right for my clients.'' Conder had lowered the rating
to ''reduce'' in early March, arguing that bad weather and the deteriorating
economies in Asia would crimp profits. The stock was then at 32. Conder
reiterated the rating several times before dropping to a sell at 19. It was a
great call: The stock trades around 10.
For sure, brokerage firms are not about to break up the money machine that
pairs analysts with dealmakers. And analysts are not about to risk offending
the companies they cover. Woe to the investor who doesn't keep these two
ideas in mind before investing on a stock recommendation.
Glenn |
