[Analysts: a related story]
the link:
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THE PHENOMENON OCCURS more often at this
time of year because January is exodus month on Wall
Street. Since most securities firms pay annual bonuses near
the end of the calendar year, many players in the industry
wait until they've pocketed the cash before they move on to
even greener pastures.
WHY SHOULD YOU CARE?
It sounds pretty harmless, but those new ratings often
move stocks - or are perceived to move them - and
investors need to be aware of whether such occurrences
should be taken seriously.
We think they should be, for a variety of reasons:
The confluence of events surrounding a new analyst's
coverage captures, in a microcosm, the relationship between
sell-side analysts and the buy-side portfolio managers and
high-net-worth individuals they try to influence. While many
fund managers say new coverage is usually not newsworthy,
it can be significant when an analyst changes an opinion after
changing firms.
This year, the process has been accelerated by all the
merger-and-acquisition activity in the brokerage industry. The
combination of Salomon Brothers and Smith Barney alone
produced a phalanx of top analysts looking for new homes,
whether by choice or circumstance.
Bodies in motion
In high demand and lured by richer prospects, analysts often switch
firms, taking their expertise and opinions along for the ride. Here's a look
at analysts movement at leading brokerages, July-December, 1997:
Brokerage
Analysts
Departed
Joined
Net
Merrill Lynch
286
23
49
+ 26
CIBC Oppenheimer
53
5
16
+ 11
NationsBanc Montgomery
52
1
10
+ 9
Morgan Stanley Dean Witter
210
1
9
+ 8
Piper Jaffray
23
1
9
+ 8
Credit Suisse First Boston
n/a
1
8
+ 7
PaineWebber
56
1
6
+ 5
BT Alex. Brown
71
0
4
+ 4
Goldman, Sachs
72
2
5
+ 3
Deutsche Morgan Grenfell
35
2
4
+ 2
A.G. Edwards
45
1
3
+ 2
Prudential Securities
53
5
7
+ 2
UBS Securities
45
1
3
+ 2
Lehman Brothers
n/a
0
1
+ 1
Bear, Stearns
68
6
6
0
Donaldson, Lufkin & Jenrette
64
2
2
0
Hambrecht & Quist
30
0
0
0
Dain Rauscher
32
11
0
- 11
Salomon Smith Barney
69
18
1
- 17
Source: Securities Week
Marc Klee, portfolio manager at John Hancock Funds,
suggests that most cases of new coverage are "less than
meaningful" because they generally amount to "recycled
analysis." But the fund manager says they can be significant
if an analyst goes from a brokerage firm with a heavy
institutional focus to one with a big retail clientele (or vice
versa), or signals a dramatic shift of viewpoint after the
switch.
Mark Klee, portfolio manager at
John Hancock Funds, suggests
that most cases of new
coverage are "less than
meaningful."
"It's meaningful if they change firms
and opinions," Klee says. "Sometimes
analysts move to a firm where they can
be more intellectually honest. If they
don't recommend a stock that they used
to like, you start to wonder. Sometimes
they're forced to cover new companies
because of the banking relationship, and
you get a different slant. It can be
refreshing."
'It's meaningful if
[analysts] change firms
and opinions.
Sometimes analysts
move to a firm where
they can be more
intellectually honest. If
they don't recommend a
stock that they used to
like, you start to
wonder.'
- MARK KLEE
John Hancock Funds
Klee refers to the fact that brokerage firms may prompt
an analyst to initiate coverage on companies with which they
already have an underwriting relationship, or are courting.
This way, the firm's sales force is armed with the analyst's
recommendation when it tries to move a given security.
The brokerage industry is unwavering in its efforts -
and required by law - to ensure that no conflicts arise
between their underwriting and research departments. But
the perception of many players on Wall Street (and individual
investors) is that analysts tend to look more favorably on
companies that have multiple relationships with their firms.
Brokerage sources flatly deny such wrongdoing and analysts
steadfastly proclaim their intellectual independence. But in
confidence, analysts admit that the potential for wrongdoing is
great.
"You definitely are asked to cover companies you might
not otherwise want to cover" because of a banking
relationship, said one highly regarded research analyst who
asked not to be identified. "Sometimes, a banker will say, 'Do
you want to be over the wall?' If you say 'yes,' you have
information on a stock with which you better be damn well
careful you don't use improperly. Analysts can find things out
and it's definitely illegal."
The analyst vehemently stated: "There's no way I'd put
a 'buy' on a stock unless I thought it was a 'buy,' no matter
what the bankers said." However, the source acknowledges
that with all the merger-and-acquisition activity going on
lately, investors should question whether analysts are
"recommending a stock because they like it," or because
their bosses have ulterior motives.
Officials at both the Securities and Exchange
Commission and the National Association of Securities
Dealers, the chief regulatory bodies for the securities
industry, said they take such transgressions seriously but have
prosecuted few cases. One reason, according to an SEC
official: Unlike insider trading violations, there is no "money
trail" if an analyst makes a recommendation of a spurious
nature.
A CASE IN POINT
Legal issues aside, let's go back to Feb. 3 for a look at
why all this might matter to individual investors.
Word that Prudential Securities
had started coverage on several
semiconductor and equipment
companies with "buy" ratings
from its new senior chip analyst
Hans Mosesmann [shown here]
was cited by traders as a factor
in the group's rise Feb. 3.
Word that Prudential Securities had
started coverage on several
semiconductor and equipment companies
with "buy" ratings was cited by traders
and many reporters (including this one)
as a factor in the group's rise. Among
those receiving "buy" ratings from
Prudential's new senior chip analyst,
Hans Mosesmann, were Intel (INTC),
which rose $3.25 that day, and Altera (ALTR), which closed
up more than $2 after being named as the "single best idea in
the group."
Find company symbol at
Microsoft Investor
Data: Microsoft Investor and
PCQuote Inc. 20 min.delay
Granted, Intel also received an upgrade from Donaldson
Lufkin & Jenrette that Tuesday and it was generally a
positive day on Wall Street. In addition, semiconductor stocks
rose in near-unanimity after lagging the prior day's big
advance because of a profit warning from National
Semiconductor (NSM).
Many market participants, traders and fund managers
alike, dismissed the impact of the new ratings on the
semiconductor group - observing that it takes a swing from
an "ax," Wall Street slang for a top analyst, to pressure or lift
stocks.
"To guys like me, it means very little," said Eric
Gustafson, portfolio manager at Stein Rowe Funds. "Some
prominent analysts with big houses do move stocks, but that
guy (Mosesmann) is not a big ax on the semiconductor
stocks."
Not to slight Mosesmann, who joined Prudential about
two months ago after stints at Volpe Brown and Needham &
Co., but traders and fund managers alike say he just doesn't
have the reputation of a Tom Kurlak, Merrill Lynch's
influential chip analyst. Mosesmann, who became a securities
analyst after spending 10 years in the industry at Advanced
Micro Devices (AMD) and Texas Instruments (TXN), filled
the void created when Mark Edelstone left Prudential in the
second quarter of 1997 to join Morgan Stanley Dean Witter.
Edelstone, by the way, is one of the more widely followed
chip analysts on the Street.
Before you dismiss the climb by the stocks given "buy"
ratings by Mosesmann as coincidence, note that the firms he
initiated with "hold" ratings - Advanced Micro, Atmel
(ATML) and Anadigics (ANAD) - only posted fractional
moves up, and Advanced Micro slid.
So maybe there is something to this, after all. While
investors should be wary of treating new coverage - even if
it is positive - as being on par with upgrades, the
announcements can move stocks anyway.
"You can get a situation where you're creating your
own destiny," said Dan Baker, co-head of institutional trading
at Jensen Securities in Portland, Ore. "An analyst comes out
with a 'buy' rating and then the firm's salesmen start making
calls and people place 'buy' orders. Then a momentum guy
sees (the stock) break some 'buy' target, and he starts
buying. It's a self-fulfilling prophecy."
Baker cautioned that this scenario is heavily dependent
on the overall tone of trading on a given day. But the
appearance of an entire firm getting behind new coverage
was seemingly evident in Mosesmann's case. On the same
day he initiated coverage, Prudential's widely followed chief
technical analyst, Ralph Acampora, issued bullish comments
on many of the same semiconductor names.
Ralph Acampora, Prudential's
chief technical analyst, said he
and Mosesmann had not in any
way coordinated before issuing
bullish comments on many of
the same semiconductor
names.
Before you conspiracy hounds get up
in arms, Acampora said the overlapping
calls were purely coincidental.
"It wasn't coordinated. I like to
double up with the fundamental story,
(but) on this day, I had no idea we'd hired
this guy and I'd never met the man," the
technician said. "Of all the years I've
been in the business, never did I ever have
anyone come down and say, 'You have to be positive' on a
given name or sector."
Though apparently done without forethought, the
combination of Acampora's comments and Mosesmann's
upgrade proved powerful on this day. Planned or not, such
occurrences raise the perception that Wall Street often acts
in a less-than-forthright manner, as do bullish ratings from
firms that enjoy multiple relationships with a given company.
As we've seen countless times, sometimes perception
isn't merely as important as reality on Wall Street - it is
reality.
The lesson: The pros don't consider new analyst
coverage the equivalent of an upgrade or downgrade - and
neither should you.
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