Who says you can't make money by following a Wall Street analyst's recommendations? Just do exactly the opposite of what they say, and you'll make out like a bandit.
And we're not talking about the stocks these analysts are plugging, either. Granted, the Street has a tough time telling investors to sell stocks anyway, but when they do, you'd think it would be a no-brainer to pick a loser in this bear market. Instead, these calls are defying gravity.
Take a look at how Credit Suisse First Boston has fared with its sell recommendations so far this year (table). First, only 11 U.S. stocks of 1,328 stocks Credit Suisse covers are on the sell list, according to Zacks Investment Research. The irony is that many of those stocks have outperformed the company's buy recommendations. One of the stocks, Winn-Dixie Stores Inc. (WIN ), hit a 52-week high on Mar. 20, while PacificCare Health Systems (PHSY ) is up 135%. The company spokeswoman's comment: "CSFB stands by the independence of its research and our analysts."
Credit Suisse isn't the only one with egg on its face. UBS Warburg has four current "reduce" ratings on the 1,015 U.S. stocks it covers. Three of those--KMart (KM ), DaimlerChrysler (DCX ), and New Plan Excel Realty Trust (NXL )--are up 64.2%, 9.3% and 17.9% this year through Mar. 20. Even Yahoo! Inc.'s (YHOO ) -50.6% free fall isn't enough to derail the group's 10.2% average price gain.
"Why should I invest in strong buys when I can buy sells?" scoffs Eric Shkolnik, president of Integrated Data Consulting Services Inc. Shkolnik, a computer programmer and investor, launched Marketperform.com in January to aggregate brokerage houses' stock recommendations tracked by Zacks and rank performance on all stock calls.
Marketperform.com's research finds that even the gurus of Internet stock picking--Henry M. Blodget of Merrill Lynch & Co. and Morgan Stanley Dean Witter's Mary G. Meeker--can't escape the so-called reverse rule of investing. In the last 18 months, the research teams under these high-profile analysts had two "neutral" ratings--a euphemism for sell--that actually rose in price, while their plethora of strong buy and buy recommendations tanked, says Shkolnik. For instance, Meeker's 15-month neutral rating (stands for sell) on VeriSign Inc. (VRSN ) was upgraded last July after it had already zoomed 490%. Since the upgrade, which still stands, it has plunged 83%. In Blodget's case, his neutral rating on Inktomi Corp. (INKT ) held in late 1999 while the stock gained 40%. Since his upgrade to buy in April 2000, the stock has fallen 95%.
SEESAW BATTLES. Then there are the analysts who are suffering whiplash from covering a particular stock. Prudential Securities Inc.'s Todd B. Ernst covers Boeing Co. (BA ) When he initiated an accumulate rating last Jan. 20, the stock traded at $46.50. By August 16, it was down a slight 0.7%. Ernst downgraded it, and the stock gained 39.8% in a month. Ernst then turned bullish on the stock on Sept. 27 and it has lost 15% since. That's three calls in less than a year, not one of which was right.
One JP Morgan H&Q analyst initiated coverage on Micron Technology Inc. (MU ) last September with a strong buy. The stock, trading at $65.25, then lost 53.7% over a month until it was downgraded to buy. The stock gained 15%, but yet another downgrade was issued in December. The stock has risen 17% since then.
To Chuck Hill, director of research at First Call Corp., the few sell recommendations made this year have been a case of "locking the barn door after the horse was out." Adds Kevin P. Tynan with Argus Research Co.: "The big houses only downgrade when it's really all over. They'll ride them to the bottom with `we loved it at $50, we really like it at $30, and it's a steal at $10,"' he says. "Then at $5, they tell you to sell."
Still, Tynan hasn't had too much luck with assigning sell calls himself. He's issued two this year on the 24 stocks he follows and one--New Plan Excel, a real estate investment trust, hit a 52-week high on Mar. 20 at $16.16. Tynan says investors are chasing a high-risk company with slim potential for a turnaround; he stands by his call. His firm, Argus, doesn't score too well, either: the 11 nontech stocks--including Circuit City (CC ), up 15%, Diageo (DEO ), up 24.1% and Newell Rubbermaid (NWL ), up 7.1%--with sell calls are up an average 5.7% since last April.
If the bear market continues, some sell ratings may indeed prove right. But investors should know that just as they got burned on the buys, sells can hurt just as much. It puts a whole new twist on contrarian investing.
By Mara Der Hovanesian in New York