Magazine article The American Prospect

Stocking Up

Magazine article The American Prospect

Stocking Up

Article excerpt

Why Analysts Inflate Stock Worth

Thorough much of the year 2000, stock market analysts at leading brokerage houses were wildly bullish on, the Internet firm that sells discounted airline tickets, groceries, and other goods. True, the company was hemorrhaging money--operating losses for 1999 ran to $63 million--but the analysts boldly predicted that Priceline would soon move into the black. In January 2000, Mark Rowen and Susan Hawkins of Prudential Securities rated the company a "strong buy," saying, "Without a doubt, consumers have adopted Priceline as a great new way to buy."

A host of other analysts joined in with their own upbeat assessments, including Credit Suisse First Boston, Jefferies and Company, PaineWebber, and Robertson Stephens. The analyst at Robertson Stephens, Lauren Cooks Levitan, gave Priceline her highest possible rating on September 8. The company was poised to take off, she informed investors in a turgid research report, thanks to "organic growth in existing businesses, the launch of new verticals employing the name-your-price model and international expansion." Buoyed by such optimistic predictions, investors poured money into Priceline. The share price soared from $45 at the start of the year to a high of $104 in March, at which time the company had a market capitalization of $16 billion--slightly higher than the gross domestic product of Senegal.

Three weeks after Cooks Levitan weighed in--and at a time that 16 of the 20 Wall Street analysts covering the company rated its stock as a "buy" or a "strong buy"--Priceline tanked. On one particularly brutal day, after the company warned that third-quarter sales would be far lower than expected, Priceline's stock plunged in value by 42 percent. As of mid-January, the stock was selling for about $3 a share--98 percent off its peak.

Priceline is just one of countless Wall Street darlings to implode during the Nasdaq meltdown that began last spring. MicroStrategy, an Internet software company, was trading at $313 in early March, and virtually every analyst covering the firm assured investors that its stock price would keep rising. As of this writing, shares of the company--which lost about $33 million last year--can be had for about $15. In July analyst Paul Merenbloom of Prudential Securities rated "Internet incubator" CMGI a strong buy and predicted its price would rise from about $45 to $155 within 12 months. Merenbloom's hunch about an impending explosion involving the company's shares was deadly accurate. Unfortunately for investors who followed his advice, CMGI's shares went through the floor instead of the ceiling; they now sell for about $6. The stock price of Qualcomm, a cell phone and telecommunications company, rose 30-fold in 1999, hitting $164 on December 31. Shortly before its peak, PaineWebber analyst Walter Piecyk predicted that Qualcomm would rise by another 65 percent by New Year's Day 2001. Instead, Qualcomm shares have sunk like a stone. They currently trade at $70.

The term stock analyst conjures up the image of a tough-minded bean counter who diligently investigates a company's balance sheet before crunching the numbers and gauging the prospects. But in fact, most analysts are little more than cheer-leaders for the firms they cover. Chuck Hill--research director for First Call/Thomson Financial, a company that tracks stock recommendations--says that as of November 1 of last year, fewer than 1 percent of roughly 27,000 ratings issued by analysts were "sells" or "strong sells"; nearly three-quarters were "strong buys" or "buys"; and almost all the rest were "holds."

To put an end to the incestuous relationship between analysts and corporations, the U.S. Securities and Exchange Commission (SEC) last October issued Rule FD (for "fair disclosure"). The rule prohibits companies from providing analysts with inside information about earnings or any other news--for example, upcoming layoffs or the resignation of a CEO--that is likely to affect share price. …

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