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On Wall Street, what's become of 'sell' signals?
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Of all the rude awakenings that the bear market in stocks has brought to investors, perhaps the most jarring has been the realization of how woefully wrong Wall Street's research analysts were last year on the stocks they follow. While the U.S. market sank to its worst performance in more than a decade, many of them kept right on smiling and saying "buy."
How can so many who are paid so much to scrutinize companies have blown it so spectacularly for their investor customers?
The answer lies in a subtle but significant change in the way Wall Street analysts do their work--and how they are rewarded for it. That shift, which has brought riches and stardom to many securities analysts, has cost investors billions of dollars in losses.
The fact is, although brokerage stock gurus are still called analysts, their day-to-day pursuits involve much less analysis and much more salesmanship than ever before.
"The competition for investing banking business is so keen that analysts' sell recommendations on stocks of banking clients or potential banking clients are very rare," said Arthur Levitt, the chairman of the U.S. Securities and Exchange Commission. "Whether this is an actual or perceived conflict, clearly, in the minds of many institutional buyers, brokerage firm analysis has diminished credibility."
Robert Olstein, a mutual-fund manager with 32 years of experience analyzing companies' financial results, said: "What passes for research on Wall Street today is shocking to me. Instead of providing investors with the kind of analysis that would have kept them from marching over cliff, analysts prodded them forward by inventing new valuation criteria for stocks that had no basis in reality and no stands of good practice."
Investors look to analysts to advise them on whether to buy or sell a stock at its current price, given its near-term business prospects.
Until the mid-1990s, that is how most analysts approached their work. But today, there is virtually no such thing as a sell recommendation from Wall Street analysts. Of the 8,000 recommendations made by analysts covering the companies in the Standard & Poor's 500 index, only 29 now are "sells," according to Zacks Investment Research in Chicago. That is less than one-half of 1 percent. On the other hand, "strong buy" recommendations number 214.
Analysts have long been known for unrelenting optimism about the companies they cover. But many investing veterans contend that the quality of Wall Street research has sunk to new lows.
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