Banking & Finance and Technology

BULLS & BEARS: Even after public dissing, analysts still too upbeat

October 3, 2005

Where can a retail investor go to get accurate recommendations and opinions on a stock?

Back in the old, old days, an investor would call a stockbroker, also called a "customer's man," and get a copy of a research report. Only good clients could get the research reports so there was an air of exclusivity about them.

Or if an investor were really diligent, he could go to the public library and leaf through the super-thin pages of the giant Value Line or Standard and Poor's books.

During the 1980s and '90s, Wall Street research went from excess baggage to profit center, as investment bankers increasingly influenced analysts' ratings to get deals done.

During the giant bull market run, the deals got done. The big firms, the analysts, the clients and everybody in between were making money. Nobody really minded the incestuous relationships between the bankers and the analysts until they lost money. People are funny that way.

But by 2002, people had lost a lot of money on "strong buy" recommendations on technology, telecom and goofy Internet stocks, and New York Attorney General Eliot Spitzer smelled an opportunity.

Spitzer's crusade against Wall Street basically started with the draw-and-quartering of Jack Grubman and Henry Blodget, the only two analysts singled out.

If you don't remember, Blodget was the one sending e-mails bad-mouthing companies he was publicly touting. This revelation got the public wondering why analysts almost never issued a "sell" rating.

As it turned out, there were plenty of analysts doing similar things. Before any others got nailed, however, the big Wall Street firms asked for the dogs to be called off, settled with Spitzer for $1.4 billion, and agreed to play by his rules.

The firms agreed to cut the collusion between the bankers and analysts and actually put "sell" ratings on stocks.

Today, airlines have replaced dot-coms as the industry in a death spiral. Actually, it seems as if for the last 30 years there has always been some airline going into bankruptcy.

According to the Air Transport Association, more than 100 U.S. airlines have gone into bankruptcy since deregulation in 1978. Just last month Northwest and Delta joined the club.

Now you would think that if there were an easy industry to justify having a "sell" rating on a stock, it would be the airlines.

Five months ago, Northwest quit giving free pretzels to coach customers because it would save the company $2 million a year. That alone should have sounded a warning bell giving analysts justification to issue a "sell."

Reuters reported on Sept. 14, the very day Northwest declared bankruptcy, that nine analysts covered Northwest Airlines and had ratings on the stock. Four still had a "buy" rating, four had a "hold," and only one had a "sell."

The one with the "sell" had no investment banking connection.

So, where can a retail investor go to get accurate information on a stock?

Luckily, today there are lots of sources of information available through the Internet. Stick with the truly independent sources, and check out how good they are. One site that might help is starmine.com, which rates analysts' records.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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