Nearly Every Stock Is A 'Buy' On Wall St.
Fed up with the steady flow of bullish stock reports his research department was churning out, brokerage executive John Goldsmith took a radical step -- he offered to pay $1,000 to the analyst who would dare tell clients to sell a stock.
''I said to my research director, 'I'm so anxious that people put out sell recommendations -- if they believe that (certain stocks) are a sell -- that I'll pay $1,000 out of my own pocket,''' said Goldsmith, chief executive of Boston-based Freedom Securities Corp. (NYSE:FSI - news) . ''And I wrote one $1,000 check -- to the research director.''
Goldsmith advertised the award five years ago. No other analyst has come forward since then to take him up on his offer.
It's not just Goldsmith's analysts who are reluctant to put out sell recommendations. Wall Street analysts overwhelmingly issue favorable reports on the stocks of companies they cover.
Buy ratings made up two-thirds of a total 26,692 U.S. analyst recommendations at the end of March, according to data from the research firm First Call Corp. The 208 sell recommendations accounted for less than 1 percent of the total. The rest were ''holds,'' which investors have learned to view as ''sells.''
The reason, industry insiders say, is that analysts think highly of the companies they cover and are spoiled by a decade-long bull market in stocks. They are also afraid to alienate management, and sometimes are pressured to issue favorable reports by their own firms' rain makers -- investment bankers that pocket fat fees for helping companies sell stock and bonds.
The lopsidedness of Wall Street research has worried Arthur Levitt, chairman of the U.S. Securities and Exchange Commission (SEC), and even stuns longtime Wall Street experts.
''I was shocked when I saw the numbers the first time,'' said Chuck Hill, a former technology analyst and now First Call's director of research. ''I knew it was going to be far more biased than it ought to be, but I did not think it was that bad.''
ROSE-COLORED GLASSES
''The majority of it is what I refer to as an honest buy bias among analysts,'' Hill said. ''They all think they are covering one of the best industries, figuring: 'Hey, this is great stuff I'm following,' so you kind of look through rose-colored glasses.''
Analysts, especially rookies, also are lulled into a false sense of security by the decade-long bull market. The U.S. stock market's main gauge, the Dow Jones industrial average, has quadrupled since the end of 1989 to over 11,000 now.
''We have had such a strong market for so long, that we have many rookie analysts who never really had to do the digging,'' Hill said. ''In this kind of environment you can parrot what the companies are telling you and get away with it.''
Moreover, a sell recommendation is sure to upset a company's management. Many analysts fear that management, in turn, will cut them off and ban them from meetings.
In fact, Goldsmith started offering the $1,000 award after a heated discussion with one of his senior analysts, who told him how important his relationship with companies' management was. A few weeks later, one of the analyst's stocks cratered because the company posted lower-than-expected profits.
''He said: 'Management lied to me,''' Goldsmith said. ''I said: 'Is this the same management you thought you would alienate if you put out a sell recommendation?'''
Companies are under pressure to post earnings per share in line with expectations, -- ''to make the number,'' in industry parlance -- or else see their stock price plummet. Few, companies however, actually have cut off analysts, Hill said, adding that's ''a lame excuse by analysts'' not to tell clients to sell a stock.
Oil analyst Michael Young of Deutsche Bank Securities recently stuck his neck out by becoming one of the few U.S. analysts with sell recommendations. Young, convinced a temporary rebound in oil prices had pushed up oil stocks too fast and too far, on April 29 told clients to sell shares of Texaco Inc. (NYSE:TX - news) and Chevron Corp. (NYSE:CHV - news) .
''The major oil companies are not dispensing information based on specific stock recommendations,'' Young said.
Still, Young took pains to explain to company officials that his rating did not reflect a judgement on management.
''I explained to the companies that I was really making a call on the price of their securities, and that it was also a call on the outlook for the price of oil, as opposed to being some sort of statement on management,'' Young said.
CONFLICTS 0F INTEREST
Besides catering to management, analysts sometimes cave in to pressure from their own firms' investment bankers to write favorable reports on banking clients, industry insiders said.
Securities firms derive a big and lucrative share of their revenues from deal making. Firms traditionally get paid for research in the form of commission income from money managers, but profit margins in that business have been shrinking.
''To justify the existence of the research department there is more pressure to support the investment banking side,'' Hill said. ''But if (analysts) are good enough, they are going to have a lot of independence and tell the bankers to buzz off.''
But potential conflicts of interest recently prompted the SEC's Levitt to issue what he called ''an early warning signal'' to Wall Street firms.
Brokerage research is far too bullish, and studies point to a ''direct correlation between the content of an analyst's recommendations and the amount of business his firm does with the issuer,'' Levitt said in a recent speech.
Wall Street executives, however, said securities firms have placed firewalls between research and banking. A firm's research credibility would be shot if analysts were mere lackeys to investment bankers.
''On the one hand, the investment bankers certainly jump up and down for top research analysts,'' said Rich Silverman, the chief spokesman of brokerage Merrill Lynch and Co. Inc. ''But at the same time they know they have to give analysts free rein because any corruption of that independence would really knock down the very thing they have been trying to build up.''
In fact, analysts must approve investment banking deals, such as stock offerings, before bankers can go ahead.
''Let's say we want to do a deal for a technology company; if our analysts say this company is not fundamentally sound, the bankers won't do the deal,'' Silverman said. ''That's why you rarely see a firm coming out with a 'sell' after the deal is done.''
Goldsmith, however, still is pushing for more ''sells.''
''If I were an analyst, and I wanted to be respected by everybody, I would probably have almost as many sell recommendations as I had buys,'' Goldsmith said. ''Half of your job is telling people when to buy stock, the other half is telling them when to sell.''
Reuters, Saturday May 15 12:29 PM ET
By Jack Reerink
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Kimball, er, Coach Kemble,
What's your take on the above article? No, please don't sweat it out.<g> I'm a street fighter and do my hard research with the help of knowledgeable people on this thread.
I'm glad when everyone else is panicking and following the herd. Still trying to learn, though, how the rich get rich. Your secret besides buy and hold, Coach?<g>
Take care.
Beni2 Mick Mormony |
