Wall Street analysts' latest tip - caution

Wall Street analysts' latest tip - caution

Wall Street has a new fad: caution.

Analysts, who have been the biggest fans of the 1990s bull market for stocks, are pulling in their horns. They are lowering investment ratings, reducing price targets and cutting earnings estimates for the companies they follow.

Derided for extreme optimism after dot-coms plunged, analysts now devote their regular TV appearances not to glittering talk of the New Economy's prospects but rather sober assessments of a recession's likelihood.

Prudential Securities Inc., a big Wall Street brokerage, is even running full-page newspaper ads touting how, "at Prudential, objective advice begins with objective research."

Investors are skeptical. It's too little, too late, they say.

"It's just amazing to me how there have been so many downgrades, particularly on technology, after the Nasdaq is down thousands of points," said Rick Jandrain, chief investment officer for equities at Columbus, Ohio-based Banc One Investment Advisors Corp., which invests about $125 billion in stocks. "For some of them, I would really question their timing."

A year ago, analysts kept moving price targets on stocks to astronomical heights. Today, many of their picks have cratered after the Nasdaq Composite Index fell 39 percent last year.

Analysts have taken action, of sorts, market data show.

The proportion of "strong buy" and "buy" recommendations has declined to 70.5 percent on Jan. 2 from 72.7 percent on March 1, according to market research firm First Call/Thomson Financial. The always tiny number of "sell" recommendations rose to 225 from 164 for the same period, less than 1 percent of some 27,000 recommendations by U.S. analysts.

The new caution comes after critics said Wall Street analysts had become cheerleaders for their firms' investment bankers. The bankers bring in much of the firms' profits, helping corporate clients sell stocks and bonds and advising them on mergers. These clients often are the same companies analysts follow.

Analysts, however, have maintained they are independent and do objective research. They would lose their credibility if they did otherwise, they say.

Analysts nowadays often win plaudits by throwing cold water on a company or sector's prospects. Examples include: Lehman Brothers debt analyst Ravi Suria, who questioned the financial health of giant Internet retailer Inc.; and Jonathan Joseph of Salomon Smith Barney, who downgraded the semiconductor sector in July just before it lost about half of its value.

Prudential ditched most of its investment banking business in December, and now is trumpeting its research.

"Everything was a buy ... you saw target prices being raised by analysts basically at will," said Michael Shea, head of the firm's equity group..

The new approach enables Prudential to "make a break from what almost all of our competitors (are) doing by eliminating the inherent conflicts that exist when a research provider (is) also an investment banking firm," Shea said.

Still, most analysts have changed their tune merely because of the economic slowdown, an observer said.

Analysts are "not suddenly rushing to say sell and strong sell," said Mitch Zacks, a vice-president with Zacks Investment Research in Chicago. "They have three speeds, strong buy, moderate buy, and hold. What you're seeing is switching from gear one to gears two and three because of deteriorating earnings."

The number of companies in the S&P 500 Index, a broad gauge of the stock market, that analysts rated a "strong buy" fell to 213 last week from 293 in June, Zacks said.

Cutting ratings after stocks slump isn't winning Wall Street analysts new fans.

"My general sense is that the tone and tenor has been toned down a little bit because many stocks have just been pounded," said Ted Bridges, a portfolio manager with Bridges Investment Counsel in Omaha, Nebraska, which manages about $1.8 billion in stocks.

"That's ironic," he said. "You'd think they'd just be pounding the tables, 'we loved it at $60, so we're just dying to buy it at $20 or $30'."

The most striking change has been in sectors such as computer networking and Internet infrastructure software companies, Bridges said.

Even now, while many analysts do a "terrific job covering fundamentals," they can't risk going too negative in their investment ratings because "they don't want to lose a source of information, they don't want to lose deals," he said.

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