Analysts Punished as Fewer Than 1% of ‘Sells’ Work Since 2009
Motorola Mobility Holdings Inc. had rallied 40 percent from its spinoff when Adnaan Ahmad started covering the stock with a “sell” rating. The mobile-phone maker has lost nearly all its gain since his Jan. 21 report.
“The market was pricing in strong profits for its handset business, which I found outrageous for a company that’s not a low-cost leader or a niche vendor,” said Ahmad, a London-based analyst at Berenberg Bank who has also covered phone stocks for Morgan Stanley and Merrill Lynch & Co.
Ahmad is one of the few analysts who issued “sell” recommendations and fewer still whose advice turned out to be right during the biggest U.S. market rally since 1955. Just 5.1 percent of analyst ratings are “sells,” according to data compiled by Bloomberg. Among 1,890 analysts tracked by Bloomberg for this story, fewer than 1 percent advised investors to unload a Standard & Poor’s 500 stock that later showed a decline, or rose only after they upgraded it, the data show.
“Any calls that an analyst makes that’s right deserves some praise and sells are so few and far between,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $85 billion. “An analyst who’s a good analyst and does great, honest work, if he puts out a ‘sell’ signal, it should be looked at.”
Diamond Offshore Drilling Inc. (DO) had rallied 73 percent by October 2009 from its March low when Scott Gruber of Sanford C. Bernstein & Co. initiated coverage with “underperform.” The Houston-based deepwater oil driller fell 33 percent, from $94.17 to $62.83, compared with an 11 percent decline by the S&P 500 Oil & Gas Drilling Index, through July 26, when New York-based Gruber lifted his rating to “market perform.” Diamond Offshore has since climbed back to $72.06.
Charles Cerankosky, the Cleveland-based analyst of Northcoast Research Holdings LLC, has maintained his “sell” call since June 2009 for Supervalu Inc. (SVU), when the Eden Prairie, Minnesota-based owner of Save-A-Lot and Albertsons grocery stores was trading at about $13. The stock has declined 20 percent in the past year, and is now at $11, as sales slumped 7.5 percent in fiscal 2011 from the prior period.
Motorola, after pioneering mobile-phone technology in the 1980s and 1990s, saw its market share fall to 2.4 percent last year from 21.9 percent in the second quarter of 2006, according to researcher Gartner Inc. Motorola Mobility, made up of the mobile-phone and set-top box businesses, was spun off from what is now Motorola Solutions Inc. after billionaire investor Carl Icahn pressed for a split to improve performance.
More than 50 percent of analysts recommend the stock today, while 38 percent rate it as a “hold.” Three analysts have a bearish recommendation. Ahmad said that while some analysts may think Motorola Mobility will get help from an improving industry and Chief Executive Officer Sanjay Jha’s leadership, he’s concerned about the company’s competition.
“I thought the company was going to be stuck between a rock and a hard place, and hence margins were going to come under pressure,” Ahmad said. “That’s been happening much more quickly than I anticipated.”
The Libertyville, Illinois-based company’s stock has lost 31 percent since Ahmad’s “sell” rating, falling from $34.88 on Jan. 21 to $23.96 yesterday.
The bearish recommendations identified by Bloomberg preceded a decline in the stock price between January 2009 to April 6, 2011. The S&P 500 companies tracked were those with at least 15 ratings and the analysts had to have given at least one recommendation in 2011.
Analysts give fewer “sell” ratings because stocks tend to rise over time, according to Eric Teal of First Citizens Bancshares Inc. and Timothy Ghriskey of the Solaris Group LLC. That makes calls like Ahmad’s notable for their rarity and accuracy, they said.
The S&P 500 doubled from its March 2009 low to 1,363.61 on April 29, its highest level since June 5, 2008, as government stimulus measures and corporate earnings that have topped analyst estimates. Only 10 stocks in the S&P 500 are lower now than when the bull market began in March 2009, according to Bloomberg data. The S&P 500 rose 0.2 percent to 1,343.6 at 4 p.m. yesterday.
“Analysts are swimming upstream,” said Teal, chief investment officer at First Citizens in Raleigh, North Carolina, which manages about $5.2 billion. “History indicates that markets rise over time, so it’s challenging for analysts to identify those companies that won’t benefit from at least a rising tide.”
The S&P 500 rose 5.7 percent annually from 1930 through 2010, data compiled by Bloomberg show. The benchmark gauge did fall 57 percent from its October 2007 record through March 2009, amid the worst recession since the Great Depression.
‘A Lot Easier’
“It was a lot easier to put ‘sells’ on in the fall of 2008 than it is today,” said Ghriskey, chief investment officer at Solaris in Bedford Hills, New York, which manages $2 billion.
Christopher Blansett, a San Francisco-based alternative energy analyst at JPMorgan Chase & Co., covers 12 companies, according to Bloomberg data. Five are rated “underweight,” four are recommended “overweight” and three are “neutral.”
Blansett, who has worked at JPMorgan for almost seven years, rated MEMC Electronic Materials Inc. (WFR) in June 2009 with an “underweight.” The stock traded as high as $20.94 at the time. The maker of silicon wafers for semiconductors and solar panels has lost about half its value since then, at $10.40 yesterday.
“We’re probably the most bearish people on the solar outlook on the Street” among larger firms, Blansett said. “You tie that with the fact that MEMC has increasingly shifted their business toward solar and they’ve increasingly impaired their balance sheet in order to increase the company’s focus on that sector. We just don’t see any reason why the stock’s going to work anytime soon.”
MEMC has missed analyst estimates for the past four quarters. The St. Peters, Missouri-based company has 10 “buy” ratings, 11 “holds” and four “sells.” It sold $550 million of senior notes March 3, according to Bloomberg data.
“Tech investors really dislike companies owning debt,” Blansett said. “The fundamental concept is these stocks and these industries are cyclical. Tech investors look for companies with good balance sheets to have buffer when the cycle rolls over. You get very concerned when there’s a company with a lot of debt.”
Blansett said that analysts that have built strong relationships with investors may be more confident in making bearish calls, while newer analysts may find it harder until they build their investor base and contacts with company management.
“It’s tough to be negative on a stock. That might reduce your level of corporate access and overall interaction with the company,” he said. “Some people don’t have the stamina to deal with being underweight companies for a very long time because it can be very painful.”
Michael Widner, a Baltimore-based analyst with Stifel Nicolaus & Co., rated D.R. Horton Inc. with a “sell” twice, in April 2009 and August 2009. The Fort Worth, Texas-based homebuilder plunged more than 70 percent in about two months to a low of $4.34 in November 2008 during the housing crisis.
Horton slumped 9.1 percent after Widner’s first “sell” recommendation in April when it had climbed to about $10, and 12 percent after his second, when it again approached $12. He lifted his rating to a “hold” in June. The stock closed at $11.76 yesterday.
“I’m not in a business for a popularity contest,” he said. “Investors recognize there’s a value to honesty. My niche is to provide good research and tell people what I think. Even though people may not like to hear ‘It’s time to sell,’ they respect it when it turns out you were right.”
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