The worst that they can bring themselves ever to say is that a stock is a “hold.” Typically, more than half of all of the ratings given by Wall Street analysts are a “buy” or stronger.īut this bias against using this word doesn’t necessarily mean that analysts’ ratings are worthless. Furthermore, during the first quarter of this year an additional newsletter had recommended that WorldCom be sold short.Ĭomplicating any comparison between Wall Street analysts and newsletters is the fact that they do not necessarily use the same words to mean the same things.Ĭonsider the word “sell.” Newsletter editors do not have any inhibitions against uttering this four-letter word and do not shy away from using it when they want to get rid of a stock.īut most analysts on Wall Street dread using the word, presumably for fear of alienating current or prospective investment banking clients. In contrast, of the nine newsletters tracked by the HFD that were recommending WorldCom for purchase at the beginning of the year, six either had downgraded it or sold it outright by the end of March.At the beginning of April, according to I/B/E/S, a firm that tracks analyst recommendations, nine of the 17 Wall Street analysts who were then following the company rated the stock either “buy” or “strong buy.” None of these 17 rated the stock a “sell” and only one thought it would underperform the market.
To use a more recent example, consider the contrast in the case of WorldCom (WCOM), which in late April was relegated almost to penny stock status: One was even shorting it for a few months. Of the eight newsletters on the Hulbert Financial Digest (HFD) monitored list that followed Enron, in contrast, no less than six sold it earlier in the year at much higher prices.Of the 13 Wall Street analysts following Enron a week before the roof fell in last November, according to Forbes magazine, 11 rated it a “buy,” one a “hold” and only one a “sell.”.For example, consider how Wall Street analysts and investment newsletters rated Enron in the months prior to its bankruptcy: These are tough days for Wall Street analysts, with polls showing the public’s respect dropping to levels previously reserved for politicians and lawyers.īut how bad of a record do analysts really have? How do they compare to investment newsletter editors, who as a general rule do not receive any pressure from investment banking departments?Īt an anecdotal level, the case for investment newsletters would appear strong.
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