Snow in August?

["Seth Sandronsky" <ssandron@xxxxxxxxxxx>]

Penners:

Is expecting Wall St. analysts to recommend a "sell" to investors like
waiting for snow in August?

Seth

'Sell' Ratings Were Few as Market Tanked
Many analysts failed to sound alarm on tech, telecom stocks

Kathleen Pender    Wednesday, March 28, 2001

Investors who were waiting for Wall Street analysts to tell them when to
sell tech and telecom stocks last year would have waited a long, long time.

During the first three months of 2000, out of 1,019 analysts covering 811
tech and telecom stocks, there were only nine new "sell" recommendations,
according to San Francisco's StarMine, which tracks analysts'
recommendations using data from IBES.

Brokerage firms have different names for their recommendations, but most
rate stocks on a five-point scale. StarMine considers the two lowest ratings
--

whatever they're called -- a "sell."

During the second three months of last year -- after the Nasdaq had peaked -
- there were only 13 new "sell" recommendations. In the third quarter,
another 13.

During the fourth quarter, when the carnage was everywhere, there were a
grand total of 47 new "sell" recommendations.

It's no secret that analysts are loath to issue "sell" recommendations. The
usual reason given is that analysts don't want to antagonize companies that
might do investment banking business with their firms.

So it's interesting to note that of the 82 new sell signals issued last
year, 23 came from Standard & Poor's, which doesn't do investment banking
business.

"It's a touchy subject," says Arnold Kaufman, editor of the S&P Outlook.
"Without panning any other organization, S&P is an independent organization
that does not get involved with investment banking or any other sell-side
activities. We don't have a retail brokerage operation. Our analysts are
pretty much free to choose the recommendation that they think is appropriate
without any political pressures. So we generate a lot of 'sell'
recommendations here. Beyond that, it's too ticklish a subject to get into."

Since S&P started its five-star rating system in 1987, its five-star (top-
rated) stocks are up 1,198 percent, compared with a 412 percent gain for the
S&P 500 index. Its one-star (lowest-rated) stocks are down 17.4 percent.

Last year, its five-star stocks gained 6.4 percent, beating the S&P 500,
which was down 10.1 percent. Oddly, its lowest-rated, one-star stocks also
beat the market, declining only 9.5 percent.

The firm with the second-largest number of "sell" signals, 15, was San
Francisco's Robertson Stephens, which does have an investment banking
division.

I asked StarMine to sift through its database looking for heroes -- analysts
who made gutsy "sell" recommendations early in the year.

Although lots of analysts made a good call or two -- hey, anybody can get
lucky -- StarMine limited its search to analysts who had at least three tech
or telecom stocks rated "hold" or lower (one of the lowest three ratings)
for more than a couple of weeks during the first half of last year.

Only a few analysts made the cut.

One was a team of telecom analysts at Bear Stearns: William Deatherage and
Bette Massick-Colombo.

According to IBES, they picked up coverage of three telecom companies --
Level 3, Williams Communications and Global Crossing -- with a "hold"
recommendation in February.

Since then, all three stocks are down substantially, but if these analysts
are heroes, they're reluctant.

Deatherage didn't return my call. Massick-Colombo wouldn't discuss the
subject.

Issuing a "sell" signal "doesn't help you out with the companies," she said.

But, I asked, doesn't it help your clients who are investors?

"Not if they own the stock," she said.

Stocks sometimes fall when an analyst cuts a rating, which doesn't sit well
with shareholders who don't want to sell.

Another gutsy call came in May, when Lawrence Borgman of Josephthal & Co.
downgraded a bunch of chip companies -- Intel, AMD, Teradyne, Altera and
Pericom Semiconductor -- from "buy" to "hold."

Although most of these companies didn't peak until a few months later, they
all ended the year lower than they were in May.

Borgman didn't get much publicity when he made the call.

Analyst Ashok Kumar of U.S. Bancorp Piper Jaffray got much more attention in
early September, when he downgraded Intel one notch from his highest rating,

a "strong buy," to a "buy."

Kumar's timing was better than Borgman's, but pity the poor shareholder who
thought "buy" means "buy." Intel stock is down 60 percent since Kumar's
call.

"Analysts are pretty limited in how they can express themselves," says David
Lichtblau, a vice president with StarMine.

"It's hard for me to say with a straight face that a 'buy' on a stock that
went down more than 50 percent is a good call. It's noteworthy that they're
changing their opinion. Still, it would have been nice if they went all the
way to 'sell.' "

The moral of this story: Take analysts' ratings with a truckload of salt.
Some analysts do excellent research, but you can't take their ratings at
face value. When an analyst changes his or her recommendation, find out why.
Read the whole report, if you can get your hands on it. Be aware of the
conflicts of interest that may exist.

These conflicts were brought to light last week when a memo from the head of
J.P. Morgan Chase's European equity research team to his analysts was leaked
to the press.

The memo said that whenever analysts planned to change their opinion on a
company, they had to notify both the company and J.P. Morgan's investment
banking division in advance. "If the company requests changes to the
research note, the analyst has the responsibility to either incorporate the
changes requested or communicate clearly why the changes cannot be made,"
the memo said, according to press reports.

The memo added that this "does not represent an approval process, but a
communication process."

Alan Markow, vice president for marketing and communication with JPMorgan
H&Q, the firm's investment bank in San Francisco, says this is standard
operating procedure on Wall Street.

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/28/BU232193.DTL

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