How are probes, prosecutions going to affect analysts?
NEW YORK — By all reckoning, financial analysts should soon be as endangered a species as the spotted owl and the Puritan tiger beetle.
Their stock picking stinks. Their reportage is less focused on edifying investors than on gaining new banking clients and not angering old ones. Their credibility as a group is shot as the market teeters and CEOs parade through courthouses across the country.
The latest “I can’t believe they put this in writing!” revelation hails from Credit Suisse First Boston in the text of emails between former analysts Jamie Kiggen and Laura Martin. In March of last year, they argued over lowering their revenue estimate for AOL Time Warner. “This may be one that you and I disagree on. I would NOT lower numbers on AOL even though they can’t make them,” since it would enrage the company, wrote Martin, who currently works in investor relations for Vivendi Universal.
The exchange was reported in the New York Times last week. Martin responded, “I don’t think you do investors a favor if you so irritate a company that they stop talking to you.”
True, but nor do you do them a favor by slapping and keeping “buy” recommendations on companies whose stock falls by 70%.
“I think analysts are going to go through a transition period where they rebuild credibility and trust,” says the CEO of one publicly traded entertainment company, “Maybe the whole system needs to be overhauled.”
Because, in a warped way, Martin is right.
“Analysts are only as good as the information they get from companies. That depends on a good, trusting relationship with management,” says another media exec.
New regulations like FD, for Fair Disclosure, try to stem the flow of exclusive information and take some of the pressure off analysts and executives — although both sides profess to hate the rule.
FD forbids companies from releasing material information on a selective basis — i.e., to preferred analysts — unless it’s provided to the general public as well.
“It’s tough. You just can’t shoot the breeze with analysts anymore,” says Jeff Smulyan, chief executive of radio and TV broadcaster Emmis Communications — even though corporations are now being forced to dole out more information than ever before. “As a CEO in America in 2002, you’re pretty much disclosing everything but your underwear size,” he says.
Others don’t think access is paramount for good analysis. “It shocks me,” says Michael Nathanson, a media analyst at research house Sanford Bernstein, referring to the caliber of much of the company research circulating today.
He said he focuses much less on meetings with management and more on delving into the numbers. “When I came to Bernstein from Time Warner and Cablevision (where he worked in the finance departments), I knew I couldn’t rely on management to give me guidance — regulation FD hasn’t changed my life at all,” he says.
It’s also easier for Nathanson to be more objective than some of his peers, since Bernstein has no investment banking arm.
Consider this: As shares tanked and companies imploded all year, most analysts never budged from “buy” recommendations — on total blowouts like Adelphia to routs like AOL Time Warner and Gemstar to severe underperformers like Walt Disney.
In fact, only about 3% of some 25,000 current investment recommendations on Wall Street are “sells.” That’s up from 2% earlier this year and 1% in 2001.
Of the few “sell” ratings around, most came so late in the game they were useless. Some analysts even slapped “sell” ratings on Adelphia, Enron and WorldCom after the companies went bankrupt.
The revelations of the past six months may have been a nadir for the profession. Some on Wall Street believe the only way to go is up.
Investors and company execs still think analysts often do strong, solid research and that some are real experts in the industries they follow. The job of analysts, they note, is to offer advice, not to spoon-feed investors.
For better or worse, “Analysts are still the most important liaisons between companies and investors,” says an IR exec at a big media company. Their ratings — mostly downgrades of late — can still move stocks. “They haven’t lost all their juice,” he says.
But if they want to stay relevant, they’ll have to put the squeeze on companies.