Stock Market Analysts

     There are currently about 4,100 stock market analysts working for 250 brokerages and investment banks.  These experts do their homework and get the inside scoop on the prospects of the companies that they follow.   Institutions pay for this research, and tend to do business and place trades with brokers whose research they find to be dependable.

     On Oct 13, 2000, Abby Cohen, the famous queen of Wall Street (Goldman-Sach's pays millions of dollars for her insight), said the market was undervalued by at least 15%. Mostly because of her comment, the whole Nasdaq market soared 230 points the next day to 3316.

      Other analysts have helped a company's stock go up by upgrading their stock rating, for example from buy to strong-buy, or contributed to a stock's plunge by changing their rating downward from say, market-outperform to just market-perform or hold.

     But isn't this their job, to inform investors about the prospects of the companies that the analyst follows?  Sure it is, but they do a lousy job of it.

      After giving a stock a buy or strong-buy rating, the analyst hesitates for months to downgrade it, even if they know that they are dead wrong. And even then they may only downgrade it from buy to hold or from strong-buy to accumulate.

      When Enron had already dropped 99%, only 1 of 14 analysts rated it a sell, and 5 still rated it a buy or a strong-buy (source Thomson Financial/First Call).

 

      Even though the investment bank that the analyst works for, may have a vested interest in the companies that they rate, most analysts don’t make lousy recommendations because they are corrupt or stupid, but rather because they really are just optimistic.

 

     On July 25, 2000, one day before Amazon.com was to report huge losses of $300 million for the quarter, no analyst rated Amazon a “sell”.  But all 25 people covering the company rated it buy or strong-buy.  A few hours before the announcement, Holly Becker, of Lehman Bros (maybe feeling a little guilty), reduced her

rating from buy, down to neutral (reading between the lines, this meant sell).  Lehman Brothers almost fired her. 

 

     Do the financial magazines do any better at picking winners?

       Well, take a look at the portfolio recommended by Worth Magazine:

      And I quote: "The editors chose the companies listed here on the basis of their sound business plans, high-quality products, solid finances, efficient operations, and capable managers ... in markets with the potential for explosive growth."

 

       April 2001, the Worth Portfolio of stocks was down 44.4% for the past 12 months and included Yahoo (down 81%), and Sycamore Networks (down 75%).

      The magazine’s only winner was (take a look at this) Enron, up 14% to $77.90. The following 6-7 months would only get worse, a lot worse. Enron would fall to 26 cents, and the other hot picks would fall another 40-50%.  This was while the editors of Worth Magazine were still recommending them.

     Then there are the experts that write books on investing, whose poor judgment leads them to make recommendations on the “best” mutual funds or “sure-fire” stocks. One Certified Financial Advisor's book said to buy Lucent Technologies, “at any price, it's a bargain”.  At that time, Lucent was selling at over $60.  It would fall to $6 within a year, and was recently trading at 94 cents ...