If an Analyst Says ‘Hold,’ He May Really Mean ‘Sell’
Bad day at the hangar: Boeing Co.’s stock was slammed down $4.625 to $42.625 on Tuesday, a 10% loss that helped drag the Dow industrials off 35.15 points to 2,530.20.
For Boeing, the hit came simply because Goldman, Sachs & Co. analyst Judith Comeau cut her rating on the stock from “buy” to “hold,” citing rising long-term development costs for the company’s planned 777 airliner.
Though a “hold” rating would hardly seem to merit a 10% drop in market value--which Comeau termed an “overreaction”--many Goldman clients obviously saw something else in Comeau’s rating change. She said “hold,” but some clients saw a “sell.”
That scenario has been played out plenty of times lately, and it’s resurrecting an old debate on Wall Street: Why don’t analysts just say what they really mean instead of hiding a stock behind the kinder and gentler “hold” label?
To look at Comeau’s earnings expectations for Boeing, it’s fairly easy to see why some long-term investors would opt to bail out. She believes that earnings could fall from $5.50 a share in 1992 to $3.70 a share in 1995, as Boeing spends billions of dollars to create the 777.
There are bitter arguments over those projections among Boeing analysts, because many of them believe that Boeing has enough plane orders, and enough control over the delivery of those planes, to avoid any decline in earnings even through 1997, despite 777 costs. “I see a smooth progression in earnings out to $8 a share in 1997,” argues analyst Paul Nisbet at Prudential-Bache Securities.
When Wall Street starts talking about 1997 in 1990, who’s right and who’s wrong becomes a debate for futurists. Nonetheless, Comeau’s numbers certainly could warrant a sell rating on Boeing, given the strength of her conviction.
So why didn’t she say sell? “It’s not what I mean,” she says flatly. “I clearly am not recommending a sale.”
The stock is a hold, Comeau says, because Boeing’s 1991 and 1992 earnings power suggest “there should be some intermediate ground” for the stock price.
She sees it trading up around $50 eventually, based on earnings expectations of $5.50 a share for 1992, compared to $4.10 this year. So there’s “no reason to sell into weakness, and there was no reason to sell (Tuesday),” she says.
But if big investors overreacted Tuesday, it was probably because there remains deep suspicion about analysts’ stock rating changes. For as long as there have been analysts, most of them have hated to rate a stock an outright “sell,” preferring to keep most of their dogs in the beige “hold” area.
One big reason for that is obvious: No corporate executive likes to have his operation labeled a loser. Because analysts rely on company insiders for much of their research data, a sell rating runs the risk that the company will cut off dialogue with the analyst.
Some brokerages have gone to some pretty outrageous lengths to try to paper over the sell label. Earlier this year, Dean Witter Reynolds changed its lowest stock rating from sell to “swap,” because some of the analysts argued that it would be less offensive to companies.
Other brokerages have adopted convoluted rating systems that have a dozen shades between buy and sell--to the point, one analyst says, “where some firms have so many ratings, no matter what happens to the stock, they’ve covered their asses.” For example, if you rate a stock a “hold, with some risk” compared to an outright sell, and it falls out of bed, you can still argue that you warned about the risk. That’s logic on Wall Street.
To be fair, there also are some cogent arguments against sell labels. Tom Brock, research director at Salomon Bros. in New York, says analysts are justifiably “gun-shy about misinterpretation of a sell. . . . The real issue is that there’s so much more to it than just a buy, sell or hold label.” That’s why analysts spend reams of paper in reports justifying their reasoning.
R. Joseph Fuchs, research chief at Kidder, Peabody & Co., notes that “one of the difficult things is to differentiate between a stock rating and a company rating.” For example, an analyst may say sell just because a stock has run up too far, too fast, and not because there’s anything fundamentally wrong with the company. But investors could construe the sell rating to mean that the company is about to see its earnings plunge.
Still, most brokerage research chiefs admit that analysts ought to be far better about saying what they really mean, despite who it hurts. That’s more important now than ever, because the truth is never worth more than during a bear market.
“There’s no question that every analyst on the Street ought to have more swaps and sells than holds now,” says Manny Korman, research director at Dean Witter.
After all, he notes, “For every portfolio manager, there are really only two decisions--buy and sell. If you own it in the portfolio, you really do buy it every day.”
STOCKS THEY REALLY DO HATE Wall Street analysts often are reluctant to advise selling a stock, preferring instead to soft-peddle their pessimism with a “hold” rating. But these stocks currently have the greatest percentage of brokerage sell recommendations as tracked by First Call, a Boston-based research-tracker. The stocks are rated on a scale of 1 to 5, with 1 a strong buy and 5 a strong sell.
Avg.broker Tues. 1990 Stock rating close chng.* Southeast Banking 4.50 $4 5/8 -76% Boise Cascade 4.50 24 1/4 -45% Tucson Electric 4.33 6 3/4 -63% Coast Savings Financial 4.00 3 1/4 -72% Golden Nugget 4.00 16 5/8 -39% Pan Am Corp. 4.00 1 1/2 -43% Russell Corp. 4.00 20 3/8 -22% Travelers Corp. 4.00 13 1/8 -64% Hechinger 3.80 8 1/8 -36% Citicorp 3.75 12 3/4 -56%
*year-to-date
Source: First Call
