I wonder how Mary Meeker fits in with AMZN:
BEWARE INVESTMENT-BANKING LINKS
The first question to ask about any recommendation is if the analyst's firm is
also the investment banker for the company. If so, that will appear in the fine
print on a brokerage firm's report. If you hear about the recommendation by
word of mouth or the media, dig deeper by calling the analyst's firm or the
company's investor-relations department.
Be especially wary of early recommendations in the case of initial public
offerings. The first recommendations usually come from the firm or firms that
lead the underwriting. Kent L. Womack, a finance professor at Dartmouth
College, says these bullish reports from the investment banker's analyst are
usually issued when the stock is below the offering price. ''That's why we call
them booster shots,'' says Womack.
If an IPO starts to look like a winner, other analysts will start coverage.
Womack studied stock- price behavior on the day buy recommendations were
issued. Buys from analysts uninvolved in the underwriting resulted in a 3.5%
price gain vs. a 1.5% gain for those from the underwriter's analyst.
DECIPHER THE RATINGS
Some firms use a simple three-part rating system--buy, hold, and sell--but
most embellish it. Robert S. Harris, a business professor at the University of
Virginia, says adding gradations gives analysts ''wiggle room'' to avoid
negative recommendations.
Some, like A.G. Edwards & Sons and Merrill Lynch & Co., use a five-rung
ratings system: two levels of buy, a neutral, and two levels of sell. Many more
stocks earn top grades than the bottom. Right now, 543 of 3,825 Merrill Lynch
analyst recommendations are in the top rating. Only eight have an outright
sell.
Some firms, like Morgan Stanley Dean Witter, use a four-part system: strong
buy, outperform, neutral, and underperform. Notice that the system gives
more prominence to telling investors to buy than to sell, which is couched as
''underperform.'' It means the same thing. Who wants to hold a stock that's
expected to be an underachiever?
At first blush, a hold, or ''neutral'' or ''market performer'' doesn't sound so
bad. What's the harm in holding it, especially if the company is still sound?
Maybe no harm if you're a long-term investor. But in the short run, the stock
may get clobbered. Institutional investors may dump the stock. Their goal is to
beat the market, so they can't afford to hold on to a stock that's only expected
to match it. That's why many pros consider a hold to be a sell.
WATCH FOR DOWNGRADES
With Wall Street's bullish bias, any downgrading is bad news. Harris says
downgrades have a far greater negative impact on stocks than upgrades
have positive. Even moving from the highest to next-highest rating can trash a
stock.
Big institutional investors know the analysts' pronouncements are not always
what they seem. But unlike individual investors, they often meet and talk with
analysts. ''A wink, a nod, or some other body language tells more than the
report,'' says Kevin Landis, portfolio manager of the Firsthand Technology
Value Fund. ''It's the individual investors who are most susceptible to
misreading the ratings,'' says Bill Gurley, an ex-technology analyst, now a
partner at Hummer Winblad Venture Partners. But if the individual knows how
to look under the company's financial hood directly, chances are he or she
will come a lot closer to getting the professionals' edge.
Glenn |
