biz.yahoo.com
Thursday June 21, 3:36 pm Eastern Time
Analysts still love fee-paying clients, hate "sell"
By Per Jebsen
NEW YORK, June 21 (Reuters) -- When coal company Peabody Energy Corp. (NYSE:BTU - news) went public in May,
UBS Warburg and four other investment banks split most of the $27.2 million in fees.
A few weeks later, UBS Warburg analyst Ronald Barone slapped a
``strong buy'' rating on Peabody Energy. He calculated the stock of ``the
leader in a revitalized coal industry'' deserved to trade at $38, 36 percent
more than its IPO price.
His report made no mention of UBS Warburg's role in the initial public
offering, but provided the following boilerplate disclosure: ``UBS may
provide corporate finance and other services to ... the companies referred
to in this report.''
It looks like it's business as usual on Wall Street despite the adoption by a
trade group last week of voluntary ethical guidelines meant to quash
criticism of biased stock research. The guidelines include a ban on linking
analyst pay to investment banking deals or promising rosy ratings to prospective corporate clients, and encourage analysts to
call it like they see it.
Spot checks show analysts still issue glowing reports on companies that have just concluded deals handled by their colleague
investment bankers, including IPOs. And analysts remain loath to issue a ``sell'' rating when their view of a company's
prospects dims, instead sticking with the euphemistic ``hold.''
``The biases on the sell-side are well-known, and anyone who throws up their hands and says: 'Oh my God, they have other
interests!' hasn't been operating with complete knowledge of the industry,'' said John Davidson, chief investment officer at
Stamford, Connecticut-based Circle Trust Co., which has $500 million in assets under management.
``You have to know where (Wall Street research) is coming from and evaluate it,'' he said. ``It's not the recommendation, it's
the model, and what they're saying about the industry and the business'' that is useful.
Some signs of change have materialized in the week after the Securities Industry Association (SIA) provided its 13-part ``Best
Practices for Research'' and Congress kicked off hearings on Wall Street research. Merrill Lynch & Co Inc. (NYSE:MER -
news) has told analysts to enhance disclosure of business relationships. In an upbeat report on Venator Group (NYSE:Z -
news), J.P. Morgan Chase & Co. (NYSE:JPM - news) analyst Harry Ikenson prominently disclosed that his firm a week
before had been lead manager on the retailer's $125 million convertible bond issue.
But by and large, securities firms still are cranking out bullish research reports on companies for which they just handled
corporate finance deals.
Leone Young, an analyst with Citigroup Inc.'s (NYSE:C - news) Salomon Smith Barney unit, started coverage of Global
Power Equipment Group Inc. (NYSE:GEG - news) on the day the SIA put out its guidelines. She gave it Salomon's most
enthusiastic rating, a ``buy,'' a month after Salomon co-led the IPO of the maker of equipment for gas turbine power plants.
Also that day, Credit Suisse First Boston analyst Jim Marks started coverage of Instinet Group Inc. (NasdaqNM:INET -
news), an electronic share trading system that is majority-owned by Reuters Group Plc (quote from Yahoo! UK & Ireland:
RTR.L), with a ``buy'' rating. A month earlier, CSFB, a unit of Zurich, Switzerland-based Credit Suisse Group Inc. , co-led
Instinet's $464 million IPO.
``It's buyer beware,'' said John Forelli, portfolio manager at Independence Investment Associates, which has $25 billion in
assets. ``Just because an investment banker is telling me to buy something, I'm not necessarily going to buy it.''
``As investors, we use reports for information, not recommendations,'' he said. ``To the extent that they do a good report ... I
find it helpful (because) the information is typically fairly accurate.''
Neither Barone, Young, Marks, nor Ikenson returned phone calls seeking comment. David Walker, a spokesman for UBS
Warburg, said: ``An analyst's rating on a particular company is based on his or her independent judgment of the fundamentals
of and prospects for the company.''
DEARTH OF SELLS
Wall Street is also still avoiding ``sell'' ratings, for fear of offending portfolio managers or corporate executives.
Jack Grubman, a high-profile Salomon telecoms analyst, on Monday cut his price target for Level 3 Communications Inc.
(NasdaqNM:LVLT - news) to $8 from $20 when the shares had closed Friday at $7.62. The telecoms analyst warned that
Level 3's ``business model has to change'' and that there is ``some uncertainty as to whether or not they're fully funded.''
Grubman's recommendation after such dire-sounding warnings? He cut Level 3 to ``neutral'' from ``buy'' rather than Salomon's
more pessimistic ``underperform'' or ``sell.''
Similarly, on Friday analyst Raj Srikanth of Deutsche Banc Alex. Brown, a unit of Frankfurt, Germany-based Deutsche Bank
AG , reduced his earnings estimates for JDS Uniphase Corp. (Toronto:JDU.TO - news), the world's largest supplier of
fiber-optic components, for fiscal 2002 by 79 percent. His research note warned that ``we believe investors will not see the
benefit of a recovery until FY 2003, i.e. more than 12 months from now.''
Srikanth reduced his rating to ``market perform'' from ``buy,'' rather than ``underperform.''
Grubman was unavailable and Srikanth declined to comment.
Morgan Stanley & Co. (NYSE:MWD - news) on Wednesday in a widely
publicized research report questioned the accounting practices and future earnings power of Qwest Communications
International Inc. (NYSE:Q - news) -- but reduced the voice and data services company to ``neutral'' rather than
``underperform.''
Wall Street analysts care first and foremost about ``the institutional portfolio managers who act on their advice,'' and a ``sell''
recommendation upsets a money manager ``because he loses money on any stock he owns that an analyst puts a sell
recommendation on because it goes down in value,'' said Mitch Zacks of Zacks Investment Research in Chicago.
Also, the management of a company an analyst covers ``becomes extremely upset at a sell recommendation (and) the
investment banking division also gets upset at a sell recommendation because it sours relations'' with the company, Zachs said.
An analyst responds to these realities ``by conveying his message with a nomenclature that he and the portfolio manager
understand,'' such as hold recommendations that are in fact masquerades for sell ratings, Zacks said.
``The system is definitely not designed for the retail investor,'' he said. ``(They) see the buy, the hold or the sell recommendation
and think that's boiling everything down to an action that's going to generate profits, and the reality is that it's not.''
Statistics bear out analysts prefer euphemistic ratings. As of last Thursday's close, ``hold'' recommendations had increased to
37.7 percent of all ratings on S & P 500 companies, from 29.8 percent at the year's beginning, reflecting the stock market
drop. Sell ratings, though, hovered at 1.2 percent, up from 0.8 percent. Last week, the number of new sell ratings was just 0.6
percent, although it ``has ticked upward slightly'' since, Zacks said.
Analysts at Prudential Securities Inc., which ditched its investment banking business late last year, are proving the exception to
the rule: about 7 percent of their recommendations are sell, according to Zacks.
KJC |
