Deciphering Analyst-Speak
| Stock Selling
Strategies Deciphering Analyst-Speak |
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To say there is a distinct buy-side bias in the brokerage community is an understatement. Brokers and analysts rarely recommend selling a stock. At least not in so many words. But broker analysts do use buzzwords that, to the trained ear, clearly spell out "Sell".
Perhaps the most blatant example of excessive optimism and reluctance to say the "S" word is Merrill Lynch analyst Henry Blodget, Merrill's resident Internet analyst. He appeared on CNBC Tuesday morning, gamely trying to defend his record. And that record? Of the 107 Internet stocks recommended by Blodget, only one went up. The stock in second place posted a 30% loss.
As Marek Fuchs, aka The Business Maven, put it in his daily newsletter Fertile Mind that day, "An orangutan throwing a dart at a stock page would have done far better." The witty Maven has little use for hypesters and the Wall Street crowd. And even less use for their language.
The Financial Post reports that Blodget still has no sell recommendations. Not one! The nearest he came was a "near-term neutral" call on eToys prior to the stock's total collapse into penny stock status.
Blodget is not the only offender. Morgan Stanley Dean Witter analyst Mary Meeker, who pulled in $US 15 million last year as an Internet guru, remains bullish despite her stable of 11 Internet stock recommendations being down an average of 83% from their highs.
But it's not just Internet stocks. Analysts and brokers tend to be biased against selling. Why? Because recommending selling is tantamount to admitting you made a mistake recommending the stock in the first place. And so analyst brokers have developed a whole lexicon of buzzwords that mean "sell", even though they seemingly mean something else.
To catch the flavour of these euphemisms for "sell", one merely needs to read through the Daily Recs page at Stockformation.com. (Linked in box at upper right). Here are a few recent examples:
Note the terms: near term neutral, long term buy, target cut, downgraded from strong buy to buy, downgraded from top pick to outperform, lowered rating from buy to hold. There are more.
In his book It's When You Sell That Counts, Donald Cassidy, a senior analyst with Lipper Analytical Services, says that all of the following analyst buzzwords should be interpreted as "Sell".
And the most dangerous word here, he argues, is hold. "In fact, hold really should generally be interpreted as meaning do not hold," says Cassidy.
This interpretation is used by Mark Hulbert in his analysis of market newsletters. The Hulbert Financial Digest tries to rate and compare an extensive collection of investment newsletters applying uniform criteria to each. One of these criteria is that hold be interpreted as sell.
This has ruffled the feathers of some newsletter writers like James Dines, who still likes to write nasty remarks about Hulbert periodically in The Dines Letter. But as Hulbert explains his rationale, when managing a newsletter's recommended portfolio, he does not sell into a vacuum. He uses the proceeds from the sold "hold" stock to purchase stocks the newsletter writer rates as "buy". Surely a "buy" recommendation is stronger than a "hold" recommendation and the newsletter writer expects the "buy" recommendation to perform better than the "hold" recommendation, otherwise he would maintain a "buy" recommendation on the stock.
So we have another stock selling strategy - sell when brokers and analysts downgrade their recommendations to one of their euphemisms for "sell".
You should be cautious when a stock is downgraded even if a buzzword for "sell" is not used. A downgrade from strong buy to buy, or from top pick to outperform, or a cut in the target price, still seems to be a positive recommendation. But it is also a downgrade, which does not bode well for the stock. Such a stock should be monitored for further downgrades if not sold right away.
Downside to Selling on Broker/Analyst Euphemisms for Sell
The big hazard to selling on a broker/analyst downgrade is that the broker/analyst could be wrong. As our examples of Blodget and Meeker above show, they often are - and in spades. So they could just as easily err on the downside as the upside. Nevertheless, given the industry reluctance to issue a sell recommendation, a sell euphemism is a fairly strong indicator that they are reluctantly backtracking or have knowledge that there is a serious problem.
Summary of Advantages
and Disadvantages
of Selling on Faltering Fundamentals
| Advantages | Disadvantages |
| Avoid a disastrous rout | Analyst could be wrong |
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