By Eric Martin and Josh Fineman | 6 June 2008
June 6 (Bloomberg)— Investors who followed the advice of analysts who say when to buy and sell shares of brokerage firms and banks lost 17 percent in the past year, twice the decline of the Standard & Poor's 500 Index.
Buying shares on the advice of Merrill Lynch & Co.'s Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor's annual survey, cost investors 17 percent, according to data compiled by Bloomberg. Deutsche Bank AG analyst Michael Mayo's counsel to purchase New York-based Lehman Brothers Holdings Inc. lost 59 percent. Citigroup Inc.'s Prashant Bhatia still rates Merrill "buy" after its 56 percent retreat from a January 2007 record. Of the 39 analysts tracked by Bloomberg who follow stocks in the Amex Securities Broker/Dealer Index, 32 (82%) produced losses for investors. Investors who bought brokerages on "buy" recommendations, sold when they switched to "hold" and speculated prices would decline when analysts said "sell," lost 17 percent in the last year through June 3, compared with the S&P 500's 8.5 percent drop.
"One would expect that if there was any industry Wall Street estimates would be more precise on, it would be their own," said Richard Weiss, who oversees $60 billion as chief investment officer at City National Bank in Beverly Hills, California. "But this particular debacle was so global in nature and pervasive, you can't blame them for missing this one."
Bank Index Fell
The Amex index of 11 companies fell 38 percent in the past 12 months as the meltdown of the subprime mortgage market forced the world's biggest financial firms to report $386 billion of losses and writedowns. In the tradition of Wall Street, analysts measure their performance based on their "buy" recommendations. On that basis, the analysts beat the Amex index by an average 18.7 percentage points.
Moszkowski, Mayo, and Bhatia, who are all based in New York, declined through representatives to comment. In a May 5 report, Mayo said Lehman's earnings may vary widely as more writedowns are taken. The bank's long-term prospects make it an appealing stock, he wrote. Moszkowski cut his earnings estimate for Lehman in a June 4 report, saying it will post a second-quarter loss rather than his previously forecast profit. Bhatia forecast a 2008 loss for Merrill in an April 18 report, saying the firm faces a "challenging market environment."
Whitney's Picks
Meredith Whitney, who correctly predicted Citigroup Inc. would reduce its dividend to preserve capital, lost 16 percent collectively at Oppenheimer & Co., her current employer, and CIBC World Markets, where she worked until mid-January. Whitney's advice included buying Lehman shares up until March 24 as the stock lost 35 percent. Whitney made investors 1.8 percent over the past three months, the eighth-best performance. A phone message left for Whitney wasn't returned, and John Parks, the director of research at Oppenheimer, didn't respond to an e-mail.
Judging analysts solely by the return their picks generate isn't fair because their goal is to beat indexes of stocks in the industry they cover, said Christopher Malloy, a professor at Harvard Business School in Boston. "Whether they make money in down markets, I don't think analysts think that way," said Malloy, who studies the performance of stock pickers. "Investors shouldn't hold them to that. There is a good deal of evidence that analysts bring some value to the market. They beat benchmarks."
Mounting Losses
Analysts cut their "buy" ratings on the brokerage industry to 41 percent from 56 percent last June as New York-based Morgan Stanley, Lehman and Merrill racked up $53 billion in losses. The number of "sell" ratings more than doubled to 10 percent, according to data compiled by Bloomberg. "Holds" climbed to 48 percent from 38 percent. Analysts rate 39 percent of all U.S. stocks "buy," down from 45 percent a year ago, 55 percent "hold" from 47 percent a year ago, and 5.6 percent "sell" from 7.5 percent at the start of June 2007. Wall Street "sell" ratings have fallen to half their level of five years ago.
Of the 19 analysts who follow Merrill, six rate the stock "buy," 10 say "hold" and three "sell." An investor who divided his money evenly and bought, sold or sold short on the advice of each analyst would have lost 32 percent, the second worst return from any of the 11 companies in the Amex Securities Broker/Dealer Index, the Bloomberg data show.
Best Performances
The analysts who made investors the most money were Charles Peabody of New York-based Portales Partners LLC and Richard Bove of Ladenburg Thalmann & Co. in Miami, Florida, whose "sell" ratings on Merrill, Morgan Stanley, Lehman and Goldman Sachs Group Inc. produced profits of 47 percent and 18 percent, respectively, according to data compiled by Bloomberg. Citigroup's Colin Devine made 4.8 percent by rating Ameriprise Financial Inc., the only brokerage stock he covers, "sell" before moving to "hold" in July.
"Ten years ago, the expectation was that analysts would simply avoid the worst excesses," Bove said in an interview. "The idea was just to beat the benchmark. Today, analysts have got to make you money in both up and down markets. No excuses." Portales's Peabody declined to comment. Devine, through Citigroup spokesman Duncan Smith, also declined to comment. Bove said other analysts may have made money-losing recommendations because they based their reports on brokerage earnings rather than examining risk in credit markets.
Losing Influence
Analysts lost influence after 10 securities firms paid $1.4 billion in 2003 to settle allegations that they used tainted research to promote investment banking clients. Regulation FD, a Securities and Exchange Commission rule implemented in 2000, prevents companies from disclosing information to analysts that they don't tell the public. Merrill ordered its stock advisers this month to boost "underperform" ratings to at least 20 percent of the stocks they follow.
Goldman Sachs had "sells" on 15 percent of the companies it covered as of April 1. Analyst "sell" recommendations across Wall Street are down from 11.1 percent in May 2003, according to Bloomberg data. "There's nothing you can glean from them that's going to make you any money," said Jack Ablin, who oversees $62 billion as chief investment officer at Harris Private Bank in Chicago. "Right now `Wall Street' and `unique research' is an oxymoron. Unless they're able to do some kind of very unique research, I don't see any of them coming up with an edge."
Average total returns for investors who followed the
recommendations of analysts for stocks in the AMEX Securities
Broker/Dealer Index, measured from June 3, 2007, through June 3,
2008. Returns factored for investors who bought on "buy"
ratings, sold on "hold" and sold short on "sell." Zero
percent returns reflect analysts rating stocks "hold" for the
designated period.
Analyst Averages
Best
# Of 1-Yr
Analyst 3 Month 6 Month 1 Year Picks
=================================================================
Charles W Peabody 10.77 29.84 46.68 4
Richard X Bove Sr 6.35 2.28 18.24 4
Colin W Devine 0.00 0.00 4.77 1
Nigel P Dally 0.00 0.00 0.00 1
Patrick O'shaughnessy 0.00 0.00 0.00 1
Tamara K Kravec 0.00 0.00 0.00 1
Thomas Gallagher 0.00 0.00 0.00 1
Worst
# Of 1-Yr
Analyst 3 Month 6 Month 1 Year Picks
=================================================================
Seth Dadds -0.17 -1.10 -46.01 2
James F Mitchell -10.85 -29.98 -44.38 4
Matt J Snowling -9.74 -10.29 -40.73 3
Susan Roth Katzke -10.85 -29.42 -40.38 4
Jeffery Harte -2.88 -23.33 -39.30 4
Tom Kersting 3.17 -17.48 -39.14 1
Michael L Mayo -8.32 -19.80 -38.05 4
David Ritter -10.94 -19.81 -31.70 4
Richard H Repetto 4.62 -0.78 -30.67 3
Michael T Vinciquerra 0.21 -0.33 -27.58 3
Glenn P Schorr -10.80 -20.36 -27.50 4
Andrew S Kligerman -7.71 -19.48 -25.80 1
Eric N Berg -7.71 -19.48 -25.80 1
Suneet Kamath -7.71 -19.48 -25.80 1
John Hall -6.83 -18.72 -25.09 1
Roger A Freeman -1.78 -1.26 -22.07 6
William F Tanona -3.88 -5.40 -18.84 8
Lauren A Smith 1.20 -7.62 -17.13 6
Guy Moszkowski 1.71 1.05 -16.89 3
Jeffrey Schuman -7.71 -16.67 -16.67 1
Matthew E Fischer 4.59 -2.85 -16.66 3
Meredith Whitney 1.82 -5.78 -16.34 4
Douglas C Sipkin 0.04 -8.44 -16.26 7
Charles Bradley Hintz 3.39 -5.20 -14.24 5
Matthew Czepliewicz -3.32 -7.03 -13.51 4
David Trone -4.09 -5.53 -12.91 9
Michael Carrier -4.07 -4.62 -12.76 3
Michael Hecht -0.30 -11.08 -12.21 7
Kenneth B Worthington 0.88 -6.14 -11.58 4
Prashant A Bhatia -0.74 -9.97 -9.15 7
Mark Lane 1.17 -8.18 -8.51 3
Howard Chen 4.48 -3.58 -2.25 3
Company Total Return Averages
Company 3 Month 6 Month 1 Year # Of
Analysts
===============================================================
Ameriprise Financial, Inc. -4.19 -10.43 -12.71 9
Td Ameritrade -2.08 -3.60 -7.11 14
E*Trade Financial 1.48 0.41 -37.60 13
Goldman Sachs Group 0.73 -9.44 -10.34 21
Interactive Brokers Group 5.02 7.63 Na 4
Jefferies Group -1.39 -6.74 -0.15 9
Lehman Brothers Holdings Inc. -13.25 -20.13 -23.87 19
Merrill Lynch & Co. Inc -2.29 -8.51 -31.73 19
Morgan Stanley 1.10 -7.17 -18.44 22
Raymond James Financial 10.16 -3.23 -4.10 5
Charles Schwab Corp. 4.73 -4.47 0.63 19
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Normxxx
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