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Analyze Stocks Like the Pros!

Rob WalkerPosted Monday, April 10, 2000, at 6:39 PM ET

Let's say you were asked to fill in for a Wall Street analyst covering Tommy Hilfiger. Your job is to tell investors whether Tommy Hilfiger stock is something they should buy, sell, or hold; and let's say you have never done anything like that before in your life. So then, on Friday, at about 7 a.m., a press release announces that the company is expecting a really lousy year. What do you do?

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If you said "downgrade," perhaps you have what it takes to be a successful Wall Street analyst. By the end of the trading day, the analysts who cover Hilfiger for ING Barings, J.P. Morgan, Salomon Smith Barney, Merrill Lynch, and Credit Suisse First Boston all did precisely what a person who hadn't been paying attention to the company at all would have done, downgrading the stock from a buy to a hold (or equivalent terminology). Of course, by the end of the trading day the stock had already fallen more than 32 percent, to a 52-week low of $9.375. This morning, Bear Stearns spoke up, also downgrading the stock. (All this according to Briefing.com.)

Why is this useful? Wouldn't it be better for an analyst to express skepticism about a company's prospects, I don't know, some time before the company makes a negative announcement and the stock has tanked? Or, alternatively, if the analysts who cover Tommy Hilfiger had some kind of belief in management and the company's brand over the long haul, then perhaps a big stock drop would cause them to simply reiterate their buy ratings. After all, if a stock is worth buying at $15, it's an ever better deal at $9, isn't it? Apparently not: No one has upgraded or reiterated a buy rating.

This is a particularly silly example of something that happens all the time in the great earnings season kabuki dance that we are now in the middle of. Analysts make a great show of their upside predictions, trotting out price targets and so forth. But bad news hardly ever comes from them; it comes from the company, and instead of predicting trouble, the analysts just scramble to sort of confirm it after that fact. By then, of course, it's far too late for the rest of us.

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COMMENTS

Reader Response from The Fray:

It's an open secret that equity analysts at big Wall Street houses are little more than shills for investment bankers, who are reluctant to alienate company managements that could throw money their way. And miffed CEOs have a boatload of ways to retaliate against analysts who have waxed too negative about mounting debt or a pesky government investigation. Of course, like any other Ponzi scheme, this system works pretty well as long as a) everyone keeps the faith and b) you can keep roping in new investors.

One rule of thumb: The last analyst on the downgrade bandwagon is the one whose firm has done the most banking business with the affected company.

--D.Blair

(To reply, click here.)

Some of the pros or their organizations have mutual funds. You can look up the performance of these in Hulbert and elsewhere. Often the performance of these pros as investors is terrible. One mutual fund sponsored apparently by a recognized publication, and another by a TV investment guru, were losers or very poor performers when everyone else was winning.

When they act in concert pros can scare the investor, which may have accounted for the debacle yesterday. The pros success here parallels that of Mr. Greenspan who does seem to be able to scare investors if only for a few days.

--Allen Scher

(To reply, click here.)

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