CREDIBILITY CONCERNS

Ever wonder why you never see a sell recommendation? Why does it take an enormous drop in share value before an analyst will make a move on a stock? What is with the complete refusal to let go of a buy rating on stocks valued with “new economy math?” Dr. Kent Womack, a finance professor at Dartmouth’s Amos Tuck School of Business, and Dr. Roni Michaely, a finance professor at Cornell University studied the conflict of interest potential and credibility of analysts who also underwrite stock. Their conclusion found that stocks recommended by underwriter analysts perform more poorly than stocks recommended with a “buy” rating by unaffiliated brokers.

The Womack-Michaely study found that in the month following the quiet period, lead underwriter analysts issue 50% more “buy” recommendations on the IPO than do analysts from other brokerage firms. Analysts unaffiliated with underwriting also have a better track record, according to the study. The authors found that stocks recommended by analysts without an investment banking ties outperformed the “big-time” CNBC worthy pundits by 15.1%.

Source: Roni Michaely and Kent L. Womack. “Conflict of Interest and the Credibility of Underwriter Analyst Recommendation.”

March 1, NASDAQ at 4,784.08

“Never before have managers of public companies been inspired to make such large aggressive bets so quickly. We call it rational recklessness.” MARY MEEKER, Morgan Stanley Dean Witter

March 10, NASDAQ at 5,048

“The Internet is definitely not large enough… to support the 400 companies that have gone public in the last few years.” HENRY BLODGET, Merrill Lynch

April 2, NASDAQ 4,572

“In technology, we’re seeing an irrational flight to sanity. It’s a panic, I’ll grant you, but it is essentially the excess of a good thing.” JOHN MANLEY, Salomon Smith Barney

April 10 NASDAQ 4,188

“The reality here is we’re dealing with a market environment that was clearly overheated…. Our simple view, we agree with the Motley Fools that 10 percent of the Internet stocks are undervalued, 90 percent may be overvalued.” MARY MEEKER (In the middle of the meltdown.)

April 25, NASDAQ 3,711

“The easy-money days are behind us.” MARY MEEKER (After cutting her revenue and profit estimates for Microsoft.)

July 17, NASDAQ 4,274

“Internet trends remain powerful. I think we are moving into the second inning. Business is really strong, which means there are still a lot of fish in the river.” MARY MEEKER