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Jewish World Review Jan. 25, 2002 / 12 Shevat, 5762

Dennis Byrne

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The unreliable crystal balls of analysts


http://www.NewsAndOpinion.com -- HERE are two words for Wall Street "analysts" in the wake of the Enron Corp. disaster: Analyze this.

Who are these guys, anyway, who think they can predict a company's earnings to the penny, yet, so many missed the most massive corporate failure in American history? Just two weeks ago, one still told stockholders to keep Enron stock, because of its "favorable tangible book value" per share, providing "limited downside from present levels." Which means: when you're 6 feet under, there's not much downside left to traverse.

The search for someone to blame for Enron's headlong dive into the tar pits no doubt will be fruitful. But let's not overlook the shadowy analysts, whose record for predicting the fate of companies makes weather forecasters look like seers.

My favorite story about analysts involves Deerfield-based Walgreen Co. This probably is not Walgreen's favorite story. Last summer the company reported record earnings. Yet Walgreen's shares dove $3.76 each, or 9 percent. The reason for this goofy reaction by "the market"? Analysts had predicted that Walgreens would earn 22 cents a share. Instead, Walgreens earned 21 cents a share. The company missed "analysts' expectations" by a lousy penny. You could look at it this way: The analysts botched their prediction, so they all should be fired. But not the Chicago analyst who said in all seriousness, "The result was clearly disappointing and below expectations. Part of the disappointment stems from the company's very strong record of consistent, high-teens earning growth."

Incredible. I suppose the analysts figured that the company finally got it right in the next quarter, when revenues were 21 cents a share, which "was in line with analysts' expectations." Or maybe the analysts finally got it right. Rest assured, Walgreens is a strong company.

So, in the midst of the Enron collapse, many analysts, not surprisingly, were divining that the stock still was a good deal. Sen. Peter Fitzgerald (R-Ill.), who sits on the Senate Commerce Committee, asked his staff to look into what analysts were recommending during the collapse. In September, after the stock had lost more than half its value, 16 of 17 analysts still were issuing "buy" or "strong buy" recommendations, Fitzgerald told the City Club of Chicago last week. Bloomberg Markets magazine reported that at least a half dozen analysts still recommended a stock buy in mid-October, after the company disclosed that ending a controversial partnership would eliminate $1.2 billion in shareholder equity. Instead of issuing cautions when the signs were turning bad, some analysts sagely brushed aside such warnings as overwrought.

Analysts are not responsible for Enron's problems, and not legally liable for the accuracy of Enron's financial disclosure statements, as are its auditors. Analysts are not responsible for proper and ethical conduct of Enron's business, as is its board. They are not required to put the interests of its shareholders first, as is its management. They're not even responsible for the dive in Enron's stock price, as they were with Walgreen's. But analysts sure shoulder a big part of the blame for Enron's disastrously inflated stock price, and the atmospheric heights from which this worthless piece of junk fell.

Fitzgerald notes that despite the public impression, analysts are not independent, objective observers. Many work for investment banks that sell investment banking services to companies that are analyzed. At the least, analysts should be required to make a "huge disclaimer" when they are connected with a company they analyze, Fitzgerald said.

Millions of those little guys, who had never invested directly in stocks before, were lured into the markets during the "exuberance" of the 1990s market run-up, in no small part because of the exuberance of analysts. Yet they're still on cable, day after day, issuing more "target" earnings for companies to hit, as if Americans are hanging on their every word. Unfortunately, too many were, and still are.



JWR contributor Dennis Byrne is a Chicago-area writer and public affairs consultant. Comment by clicking here.

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© 2002, Dennis Byrne