Bearish analysts shown to be good for investors

June 18, 2007
Analysts appear to be much more bearish-and accurate-in their outlooks since giant Wall Street firms were forced to eliminate conflicts of interest four years ago.

In 2003, former New York Attorney General Eliot Spitzer ordered 10 big firms to separate investment banking divisions from their research arms, aiming to eliminate a conflict that often resulted in rosy investment reports by analysts.

"Buy" recommendations as a percentage of U.S. stock picks fell behind "holds" for the first time ever in February-at 45.3 percent versus 47.8 percent, according to Bloomberg.

"Sells" are up to nearly 7 percent of stocks from 1.9 percent in March 2000.

Meanwhile, the amount of shorting-in which traders sell borrowed stocks expecting to buy them back when prices fall-rose in May to 3.1 percent of shares listed on the New York Stock Exchange.

The change appears to have been good for investors. Those who mimicked the "buy" and "sell" recommendations of analysts from the 10 firms beat the Standard & Poor's 500 since June 2005, according to New York research firm Investars.

Spitzer required firms including Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley to put up walls between analysts and bankers; in 2003, the companies shelled out $1.4 billion to settle claims that they and six other firms pushed stocks to please clients and keep deals flowing.

"The industry has changed and you're not anathematized if you come out with a negative opinion," said Robert Stovall, a veteran Wall Street analyst now at Wood Asset Management Inc. in Sarasota, Fla.

"It used to be that 'sell' recommendations were frowned upon," Stovall said. "I even worked at firms where the CEO said, 'I never want to see a bearish word on my stationery.'"
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