Stock analysts, like board members and company executives, like to think of themselves as an elite group of super-smart people. We objectively analyze all information at our disposal, evaluate companies’ earnings prospects, determine a fair value for the stock and recommend investors buy the stock if the current share price is lower than that fair value and recommend investors sell the stock if the current share price is higher than that fair value.
Did I say sell? Oops, that was a mistake. We never say sell. We say “Hold,” we say “Reduce,” we say “Underperform.” But “Sell?” No. Avoid sell at all costs. Congress during the Enron hearings seemed to be surprised by this.
But it’s not too difficult to understand. The reason is money. Analysts are compensated by getting investors to buy stock through their firm. This is called nickel business since the commission an institutional investor pays when buying or selling shares is a nickel. (It’s actually lower, but nickel sounds pretty good.) Analysts are also compensated for attracting investment banking business. Investment banking can be advising on a merger and acquisition (M&A) or with a private placement of shares or an initial public offering (IPO). Analysts compensation is tied to how much business he/she brings in. The tie can be tight and explicit or loose and subjective, but it is there.
If an analyst sells “sell” he/she risks losing nickel business as well as investment banking business. He loses the nickel business because the buy side doesn’t want to hear sell. You say sell to those who own and owners don’t want to hear they hold something they shouldn’t. I remember downgrading a stock to “Hold” and calling a major institutional holder with my new recommendation. After de-icing my phone from the chilly reception he said, “You can call me back when you change your recommendation.” Analysts are also expected to help the firm open brokerage accounts from senior executives of the companies they follow as well as get a piece of company share buy-backs. More nickels. A sell recommendation jeopardizes all of those revenue streams.
A sell also jeopardizes investment banking. Assume an analyst has a sell on a stock and the company decides to issue more shares. How can the analyst’s firm market additional shares of a stock to investors when it is recommending investors sell the shares. How can the analyst’s firm win IPO business from other firms in the industry if it is telling its nickel clients to sell a competitor. After all, IPOs are priced based on the price of publicly-traded competitors. How can an analyst’s firm win M&A business for that company or that industry.
Saying sell is like saying, “Please don’t pay me this year.”
It Can Get Worse
We get to Penn station and stand in a semi-mob while two EMT techs ask if we want to see a doctor. No, I want to go home. He gives to me a yellow triangular piece of paper. I think an ambulance is printed on it.
I go in the station. Wait in line to get info on how to get to Morgan’s in Montclair. I hear the people in front of me say there is a quarantine because there were chemical and/or biological weapons on the plane. I was wrong, it can get worse.
But I’m thinking, if I were a terrorist that’s what I would do. Plus I’d blow up Grand Central tomorrow and the GWB on Thursday and the Verranzano on Friday and Madison Square Garden on Saturday and then start on the rest of the country.
The Government to the Rescue
I sincerely believe the government will come to the rescue. After all who else is going to take on the necessary task of saving this system from being destroyed by lottery losers like myself whining about life’s cruelties?
The cozy relationship between government and business is amply illustrated by Enron, Global Crossing, et. al., but it is not isolated. It only becomes a scandal when the company fails. We look at the political contributions of Enron and Global Crossing as scandals. We look at the board memberships of people like Wendy Gramm on Enron as influence peddling, but the same thing goes on at American Express, Coca-Cola, Sara Lee etc. The only difference is, the latter group of companies haven't failed. But if political contributions and the thruway that exists between government and business is a scandal at Global and Enron, it is also a scandal at American Express, Sara Lee, Coca-Cola and SBC Communications also.
Where do political appointees go after their service is complete? To the large companies they oversaw. For instance, Bill Daley, former Secretary of Commerce is now President of SBC Communications. Robert Rubin is co-chairman of Citigroup. Dick Cheney became CEO of Halliburton after completing his term as Secretary of Defense.
I am fairly confident government will not do too much to eliminate the cozy relationship between business and government, since it is clearly not in their best interests to do so.
“Were You Down There?”