The Year Of The Bad Calls
Picking stocks isn't easy in any year. This year, however, a volatile market has been especially rough on the forecasters. To pinpoint just how rough, Business Week analyzed the stock choices and price targets of major brokerage and investment bank analysts from November, 1999, through January of this year and compared them with current prices. Some of the worst projections are shown in the table. Not only are these stocks way off the rosy targets forecasters made around the start of the year, but also many have nosedived by more than 70%.
Despite the bad calls, many Wall Street analysts are hanging tough. They blame a market jittery about technology, a slowdown in the economy, or special factors that no one could have foreseen. Rarely, it seems, do they blame themselves for poor analysis or for getting caught up in a market frenzy. "It's all pie in the sky," says Chuck Hill, director of research for First Call/Thomson Financial, an earnings-tracking firm. "Most of these analysts were playing the momentum game. It's not fundamental analysis; it's wishful thinking."
UNDETERRED. PaineWebber Inc.'s Walter Piecyk is one analyst who has made the star circuit. A poster boy for tech bulls, his ballyhoo on Qualcomm Inc. late last year caused a stir after the telecom company had already jumped almost thirtyfold in 1999. The 29-year-old analyst boldly predicted in late December, when he initiated coverage of the stock, that Qualcomm's stock, trading at $164 (adjusted for a 4-1 split on Dec. 31), would hit $250 in a year. As of July 26, the stock trades at 68 11/16. Piecyk's new target is $200, and he still rates the stock a "strong buy."
Clearly, price targets are a nice marketing tool, says Kent L. Womack, a professor of finance at Dartmouth College, but they don't provide investors with much value. "These price targets are, frankly, a bunch of baloney," he says. Womack's research found that a stock enjoys a brief flurry after a buy recommendation, but soon "treads water." What's worse, he says, is analysts' lack of objectivity. Some have a vested interest in pumping a stock that their firm has underwritten, for instance. Too often, analysts stick with a losing stock because they don't want to admit they made a mistake. "They think about the company like you and I think about our own children: We can't ever admit that our children are below average, and neither can some analysts," Womack says.
It's true, some analysts' stock darlings have been derailed by a change in market sentiment and some by economic factors. For instance, DoubleClick Inc. was recommended by Jamie Kiggen of Donaldson, Lufkin, & Jenrette at $124 seven months ago and now is trading at $35; Merrill Lynch & Co.'s Henry Blodget recommended RealNetworks Inc., now off 45%. Both suffered from investor disenchantment with the Internet. But more than that, these companies' underlying business is not performing as strongly as forecasted.
Despite the licking they've taken since March, tech analysts are perhaps the biggest diehards about their projections. Analyst Paul L. Merenbloom of Prudential Securities concedes he is "sucking Maalox," but he again upped his 12-month target on July 11 for CMGI Inc., which trades at $40, to $155, rating it a "strong buy." CMGI, down 72% this year, is a conglomerate that, in part, invests in Internet companies. "Every analyst will make a call that they wish they never made," explains Merenbloom. "But being an analyst means making a judgment call. You have to follow the strength of your convictions." He explains that CMGI has lost ground because "the market doesn't know what to do with it."
Senior Research Analyst Daren Marhula of U.S. Bancorp Piper Jaffray Inc. has held on to his "strong buy" for MedicaLogic/Medscape Inc., a company that provides doctors with online medical records. The current price target is $33, down from $80 in January, and the stock trades at $6. "It's the same company it was six months ago," says Marhula--but he's changed the target because of market sentiment.
Some things are out of the analysts' control, to be sure. Consider e-business company MicroStrategy Inc. There's speculation that the Securities & Exchange Commission is investigating MicroStrategy's relationship with its auditors, PricewaterhouseCoopers, as well as charges that the company pushed for accounting systems that made 1999 revenues look better than they were. That's news Steve Abrahamson, an analyst with Prudential Volpe Tech Group, could not have known. The stock plunged 62% on Mar. 20 after a revenue adjustment was made, and Abrahamson made his own adjustment: He now thinks the stock will hit $40 in 12 months, or $100 less than his target six months ago. It's trading at 30. Still bullish, he likens MicroStrategy's woes to those of Oracle Corp. in the 1990s. "These problems aren't as egregious, and Oracle survived," he says.
The tech rout has scared some analysts into using more conservative targeting tools. In January, when Emeryville (Calif.) online research company Ask Jeeves Inc. was selling for $138, one analyst pegged the 12-month target at $230. Since then, the stock has fallen almost 85%. Among other things, the company's president and chief operating officer, Edward D. Briscoe III, resigned in May. "It has been a very, very frustrating stock, and it's hard to know why it hasn't performed," says Carolyn Luthe Trabuco, an analyst with First Union Securities. She ditched judging the stock price on "relative multiples," or how similar stocks were valued, and now opts for a more conservative system: five-year discounted cash-flow analysis. Her new 12-month target is $94, less than half her original target.
Analysts would do themselves--and investors--a big favor if they would rein in their exuberance and think conservatively, especially in these nervous markets.