Equity Analysts, Learn to Type `Sell'
Mark Gilbert
(Corrects to show Lehman analyst Becker cut her Amazon
recommendation before, not after, the company reported second-
quarter results, in 15th paragraph.)
(Commentary. Mark Gilbert is a columnist for Bloomberg News.
The opinions expressed are his own.)
London, Aug. 1 (Bloomberg) -- A friend of mine who makes his
living from predicting minute-by-minute swings in the currency
market reckons equity analysts have an easy life.
He points to their seeming inability to publish ``sell''
notes on the companies they cover, and their impeccable timing in
cutting recommendations to ``accumulate'' from ``screaming buy''
-- typically the day after a company says profit has evaporated
and the shares have reached terminal velocity.
But equity analysts have made a rod for their own backs.
Whatever the reason for their reluctance to beat up on companies,
and however they mangle the language to obfuscate their opinions,
the people paid to tell investors whether a stock is worth buying
have spent so long using various strains of ``buy'' that anything
less draws the wrath of investors.
Last month, Salomon Smith Barney Inc. analyst Jonathan
Joseph's decision to cut his rating on the semiconductor industry
to ``neutral'' from ``outperform'' prompted death threats by
phone and e-mail, according to CNNfn. Death threats. On a change
to neutral, not even ``sell'' or ``underperform.''
Amy Butte, who analyzes brokerages for Bear Stearns Cos.,
received more than 200 negative e-mails since she began coverage
of Knight Trading Group Inc. in January with an ``unattractive''
rating. Some of those missives were threatening enough to merit
the attention of the bank's security department.
Credit Suisse First Boston Corp. sued 11 individual
investors, including Chuan Chang, alleging messages posted on an
Internet bulletin board criticizing the bank and one of its
analysts were defamatory. The $1 million lawsuit, filed last
month, didn't name the analyst or the other investors.
It's Only Money
Chang said the e-mail scribblers took a swipe at the analyst
for his views on Elan Corp., a specialty pharmaceutical firm.
Bloomberg data shows Elan has gained more than 40 percent since
CSFB analyst David Maris issued a Feb. 25 ``hold'' recommendation
on the shares. Two other analysts also have Elan listed as a
``hold,'' while 15 others rank it ``buy.'' The shares are up more
than 75 percent in the past year.
While no one should be threatened with violence for changing
their assessment of a company's share price outlook -- it's only
money, after all -- it's tough to generate much sympathy for the
equity community, or the CSFB lawsuit.
The five worst performing stocks for 2000 on the Standard &
Poor's 500 index as of the end of last week were Compuware Corp.,
BMC Software Inc., Novell Inc., Citrix Systems Inc. and Owens
Corning, all down 70-something percent this year.
Call a Dog a Dog
There are a total of 74 analysts recommendations on the
group -- 43 ``holds,'' 30 ``buys,'' and one lonely sell
recommendation from Donaldson Lufkin & Jenrette analyst Gregory
Nejmeh, who rates Owen Corning ``underperform.''
Are all these stocks bargains with a solid outlook,
especially at their new, lower prices? Or are analysts so
beholden to their corporate finance departments that they're
afraid to call a dog a dog?
Take this example culled randomly from last week's
recommendations (I swear it's the first one I looked up after
typing TNI HEADS ANA on my Bloomberg). A week ago, CIBC World
Markets analyst Melissa Eisenstat cut Bindview Development Corp.,
a U.S. maker of computer network-security software, to ``hold''
from ``buy.'' The stock fell more than 18 percent, closing that
day at 9 1/2.
Trouble is, the shares are already down almost 80 percent
since peaking at 41 11/16 on March 10. The company warned in
early April that it lost money in the first quarter, compared
with analysts' forecasts for it to break even, and in mid-April
reported a loss of 3 cents a share. A rebound to a profit of 1
cent a share in the second quarter has done nothing for its share
price.
Hang On, She Says
And yet Eisenstat at CIBC is telling her clients to hang
onto a stock that's traveled from about 10 a year ago all the way
up to 45 3/4 in March and back down below 10. She's not telling
them to sell it, just not to buy any more of it.
On Wednesday, Holly Becker at Lehman Brothers Inc. cut her
rating on Amazon.com Inc. to ``hold'' from ``buy'' in a report
she dubbed ``Throwing in the Towel on Amazon.'' Later that day,
after the stock market closed, Amazon said its second-quarter
loss more than doubled to 91 cents a share, and that sales of
$577.9 million for the period fell short of the $585 million
analysts had predicted.
But Becker didn't tell her clients to sell Amazon, even
though she wrote that the company ``must'' lower its customer
service costs by more than 25 percent and simultaneously increase
its sales by more than 50 percent. So much for ``throwing in the
towel.''
Let's run through that again; Amazon has to cut its costs by
a quarter, and boost its sales by a half, and still you shouldn't
be selling the stock even though it's worth less than half what
you would have paid six months ago.
Imagine
(Imagine a currency analyst putting out a report saying ``we
expect the dollar to rise to 120 yen on a six-month view, but the
`whisper number' is for 150 yen.'' Or a bond analyst saying
``well, we know you've lost about 10 points on the price of that
Italian government bond, and we still think the budget deficit is
going through the roof, and we don't expect the bond to rally,
but you should hang onto it anyway.'' Unlikely, isn't it?)
Of the 30 equity analysts whose job it is to advise clients
where Amazon is headed, 26 were telling clients to buy the stock
at the time it released earnings, according to data compiled by
First Call/Thomson Financial.
Amazon's current score is 22 ``buy'' recommendations, 12
``holds'' and one ``sell'' -- Francois Parenteau of Parenteau
Corp. in Montreal has been telling investors to sell Amazon since
he started covering the company March 31.
``I don't have someone in investment banking making huge
fees from these companies and putting pressure on me,'' said
Parenteau. ``Many analysts are getting cold feet on Amazon, but
it's like there's a line that they cannot cross. I suspect it's
because their firm has investment banking or other relationships
that pay for the thick carpets in their offices.''
Tremendous Anger
Parenteau published a ``sell'' note on VeriSign Inc., a
provider of Internet security and registration services, on July
5. ``We received a tremendous amount of bad e-mail, people asking
where did I go to school, saying I must be the dumbest guy out
there. There was tremendous anger from people, and they're angry
because they're long of the stock. When you're long, you're
bullish to a point where it blinds you.''
Parenteau declined to say how much his firm manages, though
he said he has a ``substantial short position'' in Amazon. ``We
put our money where our mouth is. We don't respond to anyone but
ourselves.''
The securities industry has profited handsomely from tying
the economic well-being of retail investors to the stock market,
and the analysts employed by the industry to dissect share prices
have a duty of care to those investors. I stress again that no
one should face the threat of violence or harassment for writing
research reports on financial markets. But if analysts persist
with mealy mouthed stock classification, they should expect
criticism.
And they should learn to type ``sell.'' |
