Fish or Cut Bait: In fragile markets at the mercy of the Fed, investors can unknowingly get killed.
By Peter D. Henig
June 5, 2000
I get a lot of hate mail.
"Idiot," the letters say. "Moron." "Loser." "My two-year-old can write better than you."
I take it as a sign of affection. I send the notes to my mom for her scrapbook. It's as if the authors, more often than not retail investors, feel that I have it in for them, that I've got a personal vendetta against their most treasured stocks.
Write a bad word against Earthlink and you get torched. Knock Amazon.com and you're fried. Even pointing out the obvious, that CDNow is not the most stable company at the moment, and you're the devil. For the record, I've got nothing against these companies. I use all three. It's their business models I've been skeptical of, particularly when there seemed to be no correlation between price, valuation, and the underlying worth of each company even three years out.
Nevertheless, I am constantly schooled otherwise, even though it's the retail investor I'm most concerned about. It's the retail investors who received double margin calls on April 14 -- one from their brokers, the other from Uncle Sam. That helped make it the ugliest day ever on the Nasdaq . Institutional investors? They can take care of themselves. They always have, and the investment banks cater to them.
SECONDARY CONCERNS
What's worrisome to me is that there are other underlying forces at work that trash stocks when retail investors aren't looking. Sometimes, investors never even know they're at work. In fact, frequently it's not what the Street is saying about a stock, but what it's choosing not to say.
A source of mine in the investment banking world tells it this way:
For instance, why is Mediaplex getting hammered by the market? Mediaplex is a technology play for online advertising. It has strong revenue growth, and while it isn't profitable, it has every chance of getting there. It has good management, great technology, and is a leader in its space. But from a high above $104 per share, it trades in the low double digits. It's valuation skulks near $500 million, when it used to hover around $4 billion.
The problem is that its Wall Street coverage has been limited. SG Cowen Securities and U.S. Bancorp Piper Jaffray rate it a Strong Buy. Lazard just picked up coverage with a Buy, as did Credit Suisse First Boston . But Lehman Brothers , a bank that took it public and was supposed to be in on the postponed secondary, hasn't reiterated its Buy rating since early March. And a source of mine in the investment banking world tells me that other investment banks who lost out on the company's proposed secondary offering have quietly been trashing the stock to institutional investors. Sure, it's third-party gossip, but when valuations are fragile, as they have been throughout this unprecedented bull run, stocks can take the dive when even the subtlest back-door hints are dropped.
Ask Jeeves is another case in point. Although Morgan Stanley Dean Witter took the company public, it lost out on the secondary to Goldman Sachs . Not a pretty sight. As a result, Morgan Stanley's analyst Mary Meeker, who had put an Outperform on the stock last October, suddenly clammed up, leaving it to Goldman Sachs to pump up shares by putting Ask Jeeves on its own recommended list. In fact, Morgan Stanley's most recent research report didn't even have Ms. Meeker's mighty name behind it, instead listing a Morgan Stanley associate as the source.
Such subtle tweaks seem barely noteworthy. But stocks can live or die by the table-pounding of Wall Street's best analysts. And behind the scenes, negative comments on a stock to institutional investors with large positions, or to potential investors who are considering ones, can shift share prices substantially.
Retail investors will rarely be let into this loop. Yet, they've been the ones driving these stocks and are often the ones left holding the bag when bad news emerges and share prices tank. Should investment banks hold a stock hostage for their own gains? Not all do. But for some, that's how the game is played. Maybe that's the way it's always been played. Maybe, even, the hate mail has been misguided all along. Not that Mom doesn't love reading it.
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