Are Tech Stock Analysts Too Powerful?

In the age of streaming stock quotes, after-hours trading and 24-hour financial news coverage, many Wall Street analysts have become stars.

From Merrill Lynch’s Henry Blodget to Anthony Noto of Goldman Sachs, stock analysts have become household names and financial power brokers.

But are they too powerful? Some critics think so, including many who believe that stock analysts played a major role in creating and then bursting the technology bubble. Others, however, say a world without stock analysts would be fraught with even more uncertainty.

While equity analysts have been around a long time, they have only recently moved into the public eye. Previously, their work was read and considered mainly by institutional investors.

Today, with some estimates saying that as much as 80 percent of the American population owns stock directly or indirectly — and with 13 million people trading online on a regular basis — analysts are informal advisers and stock-picking gurus to the masses.

Many Masters

One problem, according to Kent Womack, a professor of business administration at the Amos Tuck School of Business at Dartmouth College, is apparent or real conflicts of interest.

For instance, some analysts are employed by firms that underwrite or invest in the companies they cover, while the salaries and bonuses of others depend on their bank’s financial performance.

Womack, a former Goldman Sachs vice president, cited a Morgan Stanley memo leaked to the press several years ago stating it was company policy to “not make negative or controversial comments” about clients.

However, Womack said that there is little doubt that analysts have an impact. In a recent study, he found that a buy recommendation from a reputable analyst moves a stock up an average of 3 percent over a three-day period, while sell recommendations take stocks down 9 percent. Further, any type of recommendation can double trading volume in a stock.

Up, Up and Away

One of the most often-heard complaints against analysts is that they rarely issue anything but upbeat opinions.

In fact, at one point late in 2000, when the Nasdaq was well on its way down, First Call reported that of 27,000 recommendations on 6,000 stocks, less than 1 percent were sell ratings. By comparison, more than 70 percent of the ratings were buy or strong buy.

While the small number of sell ratings partially has to do with the nature of stock investing — selling stocks when they are down is a lousy way to make money — it has raised enough questions to create a growing cottage industry in which analysts are watching other analysts.

Analyze This

In the past year, sites such as BullldogResearch.comand Validea.com have sprung up to track analysts and report on their accuracy over time.

To their credit, Wall Street analysts do tend to outperform the average stock-picking amateur by as much as 5 percent, according to Validea president Henry Siegel.

But looking to stock analysts to separate the wheat from the chaff is something “that has been conspicuously absent from the stock research terrain, as more and more people claim to be experts at picking stocks, Siegel said.

According to Siegel, the goal of watchdog sites like Validea is to hold stock analysts accountable, “so they’ll be a little less cavalier when they’re playing with other people’s money.”

Do They Bite?

Lately, some analysts have shed the lapdog image and become bulldogs themselves — and grabbed some headlines along the way.

For example, former Lehman Brothers bond analyst Ravi Suria made a name for himself by repeatedly questioning the long-term credit health of Amazon.com, even before the e-commerce bubble started to burst.

One of his reports has become the focus of substantial intrigue and was the impetus for several lawsuits. After the February 6th report came out, Amazon shares dropped on the warning that Amazon could face a cash crunch later this year and that investors should avoid Amazon convertible bonds.

The Amazon Trail

Amazon reportedly received the report several days before it was released. According to published reports and lawsuits, Amazon chief executive officer Jeff Bezos sold a substantial block of stock — as much as 800,000 shares — in the interim.

However, Amazon spokesperson Bill Curry told reporters that the timing of Bezos’ stock sale had more to do with the release of the company’s quarterly earnings report than Suria’s report. Company policy prohibits trades until three days after earnings results are announced.

On Monday, Amazon provided a welcome dose of good news for Wall Street analysts, saying that it would post a narrower-than-expected loss for the first quarter due to surging electronic sales.

As for Suria, he left Lehman last month. He now manages a private hedge fund, where he is much less likely to be in the public eye — which is probably just fine with the companies he used to hound.

1 Comment

  • Like executives of corporations, analysts should be fined or jailed when they steer stocks lower with their personal opinions. They are that powerful. I’ve noticed lately they can power stocks downward but seem to have little support from the buyers to make stocks move up. Analysts are becoming too pompous and should be regulated. The Feds might think of not letting analysts affiliated with a brokerage house give their views.

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