biz.yahoo.com
Sunday September 24, 1:47 pm Eastern Time
Wall Street Analysts Miss the Ball
By Kristin Roberts
NEW YORK (Reuters) - Wall Street's failure to forecast the impact of a tumbling euro and surging oil prices on U.S. corporate profits has fueled concern among traders and investors that analysts are too often behind the curve.
A string of companies including razor maker Gillette Co. (NYSE:G - news), aluminum giant Alcoa Inc.(NYSE:AA - news) and Goodyear Tire & Rubber (NYSE:GT - news) warned last week that the double whammy from currency and energy markets meant they would not meet financial expectations.
The reaction? Well, that's just it. The market was surprised and analysts reacted, cutting targets in accordance with new guidance. Stocks dropped, pulling major U.S. indexes lower and indicating the announcements were really news to many people.
``They (analysts) get spoon-fed the information by investor relations officers and they have a very strong tendency to put a positive swing or twist on everything,'' Hugh Johnson, chief investment officer at First Albany Corp., said. ``They don't know because they're not told. And like sheep they follow.''
Less than one percent of all U.S. analysts' stock recommendations are ``sell'' ratings, according to First Call/Thomson Financial data.
While some analysts are not surprised by the warnings, many who rely on getting information mainly from a company's executives leave themselves exposed, he added.
SPOON-FEEDING
Analysts depend on company executives for a great deal of information on financial operations. No doubt, some companies are not forthcoming and most will not reward the Street with the secrets of their hedging policies -- policies that are supposed to account for the effect of fluctuations in, say, the euro.
``You're at their mercy on what their hedging policy is,'' said Chuck Hill, research director at tracking firm First Call/Thomson Financial. ``There is no way to go out and dig for that. But are analysts putting the companies' feet to the fire?
``The way to do it is not, 'Oh hey, how much impact is currency going to have on your earnings?''' Hill said. ``I mean if you want to be spoon-fed you probably aren't going to get a very good reception.''
But by cornering companies with pre-calculated numbers, figuring in a hedging scenario and the absence of one, analysts may have more luck prying realistic guidance from executives.
``Now, they're not telling you right out what their hedging policy is but you've done some work and they've given you something relative to what you've done,'' Hill said. ``My guess is they probably didn't get a whole lot of questions phrased that way.''
New Securities and Exchange Commission rules known as Regulation FD, or Fair Disclosure, will surely affect how analysts work, industry experts said. The rules go into effect in October and are meant to prevent companies from releasing material information exclusively to big-time investors and analysts while locking out individuals.
That may stifle many analysts and push the diligent ones into the spotlight, just as it did late last week when a warning on European revenues from computer-chip giant Intel Corp. (NasdaqNM:INTC - news) surprised the market.
Only one analyst foresaw Intel's European demand problem -- Ashok Kumar of USBancorp Piper Jaffray, known as a contrarian on Wall Street and one of the few computer analysts who regularly canvasses the companies that buy and distribute Intel chips to gauge demand. He downgraded the stock two weeks ago.
INFORMATION IN THE MIST
``All you've got to do is look at the currency markets, at raw materials going through the roof,'' Adam Weisman, a trader and managing director at Wit SoundView, said. ``All you have to do is pick up the paper every day. To be shocked that the price of raw materials is going up and may impact the bottom line, well I don't see how you can be shocked by that.''
The analysts like Kumar who do their homework are rewarded for it with a big following among traders, market makers and investors. Still, the tendency to be overwhelmingly bullish has turned into an epidemic and is closely tied to their reactive habits, investment managers said.
Of the roughly 28,000 current U.S. stock recommendations, 36.5 percent are ``strong buys,'' 37.5 percent are ``buys,'' 25.3 percent are ``holds'' while just 0.4 percent are ``sells'' and 0.2 percent are ``strong sells,'' according to First Call data.
Even after many companies warned investors of shortfalls this week, most analysts responded by playing with price targets and lowering estimates. Few downgraded.
``The problem is that in this kind of market you can get away with regurgitating what the company tells you,'' First Call's Hill said. ``Whether it's been done deliberately, that you were lazy and didn't want to do the work you knew you should be doing, or whether it's naivete and you're a new analyst sometime in the 90s and you haven't really experienced the real downturn in the economy.''
Many fund managers and investment advisers say they still read analyst reports but they rely more heavily on their own.
``My primary source of research is the legwork I do, talking to companies and going to conferences,'' Stein Roe & Farnham fund manager David Brady said. ``That's my first line of research.''
``The analytical reports from Wall Street are very important,'' he said. ``You have to read though for the information content, not necessarily the recommendations.'' |
