The prevailing image of Wall Street analysts is that they don't know how to say "sell." But a few seem to be trying to change that view--even if the semantics involved may still confuse many investors.
On Tuesday, J.P. Morgan Securities analyst Gregory Smith didn't just tweak his view of Multex.com after the company said it would miss profit forecasts.
Smith removed his "buy" rating on the provider of securities research over the Internet and immediately slapped a "market underperform" rating on it.
In Wall Street parlance, market underperform is synonymous with "sell," even though it sounds less dire.
Sell ratings, rare enough on Wall Street, almost never get affixed to a company rated "buy" before an interim stop at "hold" or "market perform," investors said.
But Smith said he had no choice after Multex's surprise announcement that it will lose $1 million in the second quarter, as some big brokerages have deferred or canceled research-distribution projects with the firm.
"It really caught us off guard," Smith said. Realizing the stock would drop, he thought, "I don't see how I can have anything but a 'market underperform' on it," he said.
By contrast, Merrill Lynch & Co. analyst Michael Hughes cut his Multex rating to "neutral" from "accumulate" for investors with a 12-month horizon. U.S. Bancorp Piper Jaffray analyst Brett Manderfeld reduced his rating to "neutral" from "buy."
Smith's was "a fairly drastic move and normally you don't see that," said Gil Knight, a money manager at Allied Investment Advisors, which manages $13 billion.
Indeed, Congress recently held hearings on the perceived lack of objectivity in analysts' recommendations. Brokerages have been hammered in the last year for continuing to recommend many technology shares even as they collapsed. Critics say brokerages are afraid to offend potential investment banking clients with "sell" ratings.
Multex's shares (ticker symbol: MLTX) reacted dramatically to the earnings warning and the rating cuts Tuesday, plunging $7.79, or 49%, to $8.22 on Nasdaq.
Smith, who has been covering electronic-brokerage stocks for four years, said Multex shares could remain at lower levels for at least a few quarters, though he said the firm isn't in financial danger.
"They lost a significant amount of recurring revenue, which came as a shock," he said. "This company has historically had a high level of recurring revenue. Seventy percent is based on long-term contracts. We felt secure in them and felt they would provide a buffer in tough times."
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Shares of Multex.com, which provides securities research over the Internet, lost nearly half their value Tuesday after a J.P. Morgan analyst advised selling the stock in the wake of an earnings warning.
Weekly closes and latest for MLTX
Source: Bloomberg News