To: Dave Gore who wrote ( 28167) 6/15/2001 12:59:30 PM From: ColtonGang Read Replies (2) | Respond to of 37746 Analysts got it way wrong in 2000 Study shows Wall Street research suffered 'disaster' By Thom Calandra, CBS MarketWatch Last Update: 10:03 AM ET June 15, 2001 LONDON (FTMW) - A new study shows Wall Street analysts' favorite stocks last year plunged in value while their "sell" and other negative recommendations gained. The study from four California professors is sure to add fuel to the debate about the value of stock-market research that emanates from Wall Street investment banks. That debate has entered Washington, where lawmakers this week examined gaps in the reliability of Wall Street research. Accounting professor Brett Trueman of the University of California's Haas School of Business and three co-authors examined "buy" and "sell" recommendations from 1996 through 2000. "The year 2000 was terrible for analysts," said Trueman. The study concludes that stocks most highly recommended by analysts last year fell 31.2 percent below the performance of the U.S. stock market. Their least favorably recommended stocks outperformed the market by almost 49 percent. "It paid last year to act contrary to the analysts' recommendations," said Trueman. Analysts erred the most on technology stocks, shows the study, whose co-authors were Brad Barber of the University of California at Davis, Reuven Lehavy at the Haas School of Business in Berkeley and Maureen McNichols at Stanford University's Graduate School of Business. The study sized up 168,281 Wall Street ratings from 213 brokerage houses during the five-year span. They issued research on 9,621 companies. In every one of the five years but last year, the most highly rated stocks - those with "buys" and "strong buy" recommendations - beat the market-adjusted returns of analysts' spurned stocks - those with "hold," "sell" and "strong sell" labels place on them. The professors calculated yearly market-adjusted returns by comparing the raw returns of the five different classes of analyst recommendations with an index representing the overall U.S. stock market. "With investment banking business booming during the late '90s and early 2000, the belief spread that these analysts were focused on attracting and retaining clients rather than on writing research reports which accurately reflected their opinions of the firms they were following," said the report, whose title is "Prophets and Losses." To be sure, seasoned investors know that many Wall Street analysts, afraid of offending a potential banking client, refrain from issuing "sell" recommendations until the stock has neared bottom. The returns on these spurned stocks, in a contrarian point of view, is more likely to beat the overall stock market's return than a high-priced share that has received a coveted "strong buy" or "buy." Still, last year, after stocks surged in the first three months, then tumbled the following nine, was a departure from research that stretched back to 1986, the report showed. The negative 31.2 percent market-adjusted return on the most favorably rated stocks last year was five standard deviations lower than the average return on analysts' favorite stocks for the previous 14 years. The 48.66 positive return for the spurned stocks was five deviations higher than the average return for the group in the same 14 years. Indeed, the study highlights the difference in the yearly return between the analysts' least favorite stocks and their most highly recommended ones was 80 percentage points. The impotent Wall Street research stuck to the pattern for most months of last year, during up and down periods. Trueman called it a "terrible year" for the analysts. It was a year when analysts, hoping to see stocks bounce back to their record-breaking levels of early March, were reluctant to publish negative reports about any company. The study names no specific analysts or stocks. Yet examples are everywhere. When, for instance, "sell" recommendations came out on eToys (ETYS: news, msgs, alerts) , an Internet retailer that has since gone out of business, and Priceline.com (PCLN: news, msgs, alerts) , which is still operating, the companies' shares were well below their peak. The report discards the theory that Regulation FD, the new Securities and Exchange Commission ruling that prevents companies from revealing important financial information to analysts, skewed the results. The regulation took effect in October. "Even if Reg FD were to reduce the value of analysts' recommendations overall, there is no reason to expect that the buy recommendations would do worse than the sell recommendations," the report said. "The year 2000 was a disaster," the professors concluded in the study. "Our findings should certainly add to the current debate over the usefulness of analysts' stock recommendations to investors." The report examined technology and non-technology shares. Earlier in the week, Wall Street's trade association, the Securities Industry Association, unveiled a code of conduct designed to increase independent analysis. That was followed by a hearing at the House Capital Markets subcommittee in Washington about the role Wall Street analysts play in financial markets.