Time to look back at some astute articles. Note the date 12/31/2000!!!!
<<Grubman: Grubman declined to comment. But in a Business Week article last May, he scoffed at the idea that his help peddling investment banking services to corporations put him in conflict with his firm's investor customers.
"What used to be a conflict is now a synergy," Grubman said. >>>>
Shouting 'buy' and little else
Analysts tout stocks, even as they slide
By GRETCHEN MORGENSON
New York Times
Last Updated: Dec. 31, 2000
New York - Of all the rude awakenings that the bear market has brought to investors, perhaps the most jarring has been the realization of how woefully wrong Wall Street's research analysts have been in the past year on the stocks they follow. While the market sank to its worst performance in more than a decade, many of them kept right on smiling and saying "buy."
How can so many who are paid so much to scrutinize companies have blown it so spectacularly for their investor customers?
The answer lies in a subtle but significant change in the way Wall Street analysts do their work - and how they are rewarded for it. That shift, which has brought riches and stardom to many securities analysts, has cost investors billions of dollars in losses.
The fact is, although brokerage firm stock gurus are still called analysts, their day-to-day pursuits involve much less analysis and much more salesmanship than ever before.
"The competition for investment banking business is so keen that analysts' sell recommendations on stocks of banking clients or potential banking clients are very rare," said Arthur Levitt, the chairman of the Securities and Exchange Commission.
"Whether this is an actual or perceived conflict, clearly, in the minds of many institutional buyers, brokerage firm analysis has diminished credibility."
Robert Olstein, a mutual fund manager with 32 years of experience analyzing companies' financial results, agrees. He said analysts today are more like racetrack touts than sharp-penciled researchers.
"What passes for research on Wall Street today is shocking to me," Olstein said. "Instead of providing investors with the kind of analysis that would have kept them from marching over the cliff, analysts prodded them forward by inventing new valuation criteria for stocks that had no basis in reality and no standards of good practice."
(Internet analysts, for example, have cited visits to a Web site as a reason for optimism.
But, Olstein said, "Investors can't take page views to the bank.")
No one, of course, can know what stocks will do tomorrow, much less in the coming year; but Wall Street's analysts are supposed to help investors judge the attractiveness of companies' shares. Investors look to analysts to advise them on whether to buy or sell a stock at its current price, given its near-term business prospects.
Until the mid-1990s, that is how most analysts approached their work. Today, there is virtually no such thing as a sell recommendation from Wall Street analysts. Of the 8,000
recommendations made by analysts covering the companies in the Standard & Poor's 500 index, only 29 now are sells, according to Zacks Investment Research in Chicago. That's less than one-half of 1%. On the other hand, "strong buy" recommendations number 214.
Companies' needs first
Analysts have long been known for unrelenting optimism about the companies they cover. But many investing veterans say that the quality of Wall Street research has sunk to new lows.
That decline, they say, is the result of shifting economics in the brokerage business that has pushed many researchers to put their firms' relationships with the companies they follow ahead of investors.
The commissions charged by Wall Street firms to their institutional and individual customers for trading stocks are one factor. These fees were much higher in the 1970s and 1980s, such as 10 cents a share on trades then vs. a penny or less now. Because analysts' recommendations helped generate trades and commissions, research departments paid for themselves. More important, an analyst who uncovered a time bomb ticking away within a company's financial statements and who advised his customers to sell its shares made an important contribution to his firm in commissions those sales generated. In short, analysts were rewarded for doing good, hard digging.
But as commissions declined, Wall Street firms looked elsewhere for ways to cover the costs of research.
The lucrative area of investment banking was an obvious choice. Analysts soon began going on sales calls for their firms, which were competing for stock underwritings, debt offerings and other investment banking deals from corporations. In this world, negative research reports carried a cost, not a benefit.
The result, money managers say, is that the traditional role of analyst as adviser to investors has been severely compromised. The increasingly close relationships analysts have with corporate executives have led many of them to be gulled by managements intent on keeping the prices of their stocks up.
"Research analysts have become either touts for their firms' corporate finance departments or the distribution system for the party line of the companies they follow," said Stefan Abrams, chief investment officer for asset allocation at Trust Co. of the West in Manhattan.
"Not only are they not doing the research, they have totally lost track of equity values. And the customer who followed the analyst's advice is paying the price."
Analysts remain upbeat
For many investors, that price keeps going up. In the past few months, as former stock market favorites crashed to earth, many top analysts remained maddeningly upbeat all the way down.
Consider Mary Meeker, the analyst at Morgan Stanley Dean Witter who became known as the Queen of the Internet for her prognostications on e-commerce companies like Amazon.com and Priceline. In 1999, as Internet stocks soared and new companies were taken public in droves,
Meeker made $15 million, according to press reports.
Now that Internet stocks are in pieces on the ground, she has become decidedly less vocal - but no less optimistic. In her reports, she still rates all 11 Internet stocks she follows as "outperform" even though as a group they are down an average 83%. By comparison, the Interactive Week Internet index is down 60% from its recent peak. Of the 11 companies Meeker remains positive on, eight had securities underwritten by Morgan Stanley.
Meeker declined to comment for this article. But Ray O'Rourke, a Morgan Stanley Dean Witter spokesman, defended his star analyst, saying that her picks had been made for the long-term.
Moreover, he said, Meeker warned investors last March that Internet stocks were volatile.
Asked about Meeker's record and whether her non-stop optimism had anything to do with the fact that most of the companies had engaged Morgan Stanley as an investment bank, O'Rourke said: "It is what it is. But you shouldn't be surprised necessarily to see 'outperforms' on the companies, because we've been very vigorous on the companies we've chosen to bring public."
Anthony Noto, at Goldman Sachs, is another Internet-stocks analyst who remained upbeat on shares that were trading at a fraction of their former values. On Dec. 18, he lowered the ratings to "market performer" on four of the nine stocks he follows, including Webvan Group, an Internet grocer; Ashford.com and Etoys, two troubled e-tailers; and PlanetRX.com, an online resource for medical products that was in danger of being delisted by the Nasdaq stock exchange.
The companies were downgraded after they had dropped on average 98.2% during the previous 52 weeks.
Of the nine stocks Noto follows, seven had stock offerings underwritten by Goldman Sachs.
"Our research is driven by fundamental analysis and is not influenced by anything else,"
Noto said. He explained that the companies he followed saw their stock prices drop last spring not because their operations were failing but because market psychology changed. He downgraded the stocks much later because only then had it become clear through research that the companies' results were deteriorating.
"In hindsight," he said, "we should have lowered our ratings sooner. We regret that."
Faces are also red - or should be - over at Salomon Smith Barney. Jack Grubman, the highest-paid analyst at the firm and, perhaps on Wall Street, reportedly made $20 million
last year in his job covering the telecommunications industry. Investors who have followed his picks have not done as well.
Grubman began to advise caution on the 11 smallish telecom companies he covers in the so-called competitive local exchange carriers sector only two months ago, after the stocks in the group had already lost 77% of their value. All 11 had securities underwritten by Salomon.
Grubman declined to comment. But in a Business Week article last May, he scoffed at the idea that his help peddling investment banking services to corporations put him in conflict with his firm's investor customers.
"What used to be a conflict is now a synergy," Grubman said. |
