Wednesday, December 27, 2006

Stock Upgrades I'd Like to See

IBM upgraded to Buy From Sell at ThinkEquity

That’s the first half of the headline on this morning, and I am not making it up.

Nor am I making up the second half of the headline:

Tgt raised to $110 from $70

“Gosh,” you might be thinking: “something profound must have changed to account for this $41 per share increase in the fellow’s ‘price target’ for IBM!”

And you would be wrong.

What has changed—let’s be honest about this—is the price of IBM’s stock itself.

As anybody with a Bloomberg machine or even Yahoo! Finance can see, IBM’s shares are 95 bucks, which happens to be much closer to $110—the new price target of the ThinkEquity research gurus—than to $70, which was the previous price target of the ThinkEquity research gurus.

And since it’s close to year-end, and since it doesn’t look like IBM stock is going down to $70 any time soon, what better time to upgrade the shares using some highfalutin excuse like, oh, this:

Increased performance and profitability in IBM’s Global Service segment, together with strong software sales, causes us to reconsider our SELL rating and now recommend it as a BUY for this quarter.

And that’s precisely how the ThinkEquity gurus start their multi-page about-face research report.

However, I believe there is an entirely more straightforward rational, and if I'd written the research report, and had been as wrong about IBM stock as the ThinkEquity folks have been—and believe me, I’ve been even wronger, to coin a word, on more stocks than the poor fellows in this case—it might instead start like this:

We are changing our rating on IBM from “SELL” to “BUY” and raising our price target from $70 to $110 for the following reasons:

1. We’ve been so wrong on the stock that it makes my head hurt when I wake up in the morning and realize “this is not a dream.”

2. My research director thinks I’m an idiot.

3. The sales people won’t make eye contact with me in the hallways—it’s like I’m dead meat. And when we marketed in Appleton last week the sales guy kept rolling his eyes while I talked. And I swear he was making those “he’s crazy” circles twirling his finger around his ear behind my back.

4. It doesn’t look like the stock is going to $70 any time soon. In fact, the chart looks like it blows through $100 and doesn’t stop until $110. At least, that’s what Cramer says. What the hell do I know?

5. Every time I look at the screen I know there are probably sixty or seventy stock tickers up there, but the only ticker I can see is IBM. It’s like my brain can’t focus on anything else but that stupid stock. It goes up every ----ing day.

6. It’s year-end: I can score points with clients upgrading into year-end. So why not?

Why not, indeed?

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


ssssssss....... said...

Maybe analysts should use trailing stop orders for their price targets.

whydibuy said...

This probably won't be the only one. I see quite a few ticker symbols above the 12 month price targets. This last rally from July seems to have caused alot of whiplash cases for investors; bonds tumble strait line from Jan into July and have now strait lined up taking the stock market with it regardless of the security worthiness. Just another example of the market confounding its participants. But then again, if it was easy, everyone would be rich. I see Ken Fisher, whom I admire thinks the market is 80% undervalued. I'm not making that up. He was a guest on the Fox Forbes weekend show. Good of call as any I guess and probably right since it seems almost inconceivable to me so it'll probably happen. I sure have no clue what makes 'em go up or down.

Sam E. Antar said...


You forgot the disclaimer. I have respectfully offered mine.

As analysts we rely on the integrity of financial information being published. These financial statements are audited by Certified Public Accountants at independent accounting firms.

We believe that many CPA’s do not have adequate education, knowledge, experience, and training in fraud, internal controls and other areas crucial to their work.

Many accounting firms believe they should be insulated from ineffective audits by legislation limiting their liability rather than realistically address the issues of why they sometimes conduct ineffective audits.

If this proposed legislation comes into law your loss recovery from audit melt downs will dwindle from the pittance you may currently receive under present law. Therefore, we believe many audit opinions are based on faith and you may not get the auditors to pay for it.

The members of the so-called “independent” Audit Committees who monitor the auditors, internal controls, and the reporting process in most cases have less education, knowledge, experience, and training than the independent external auditors. Therefore, you may have less knowledgeable people monitoring the relatively inadequately educated and unskilled auditors.

Many “independent” Audit Committee members get stock options and own stock in the company whose Audit Committee they serve on. They hold to a lower standard of independence than the CPA firms they monitor since the auditors cannot own the stock of audit clients. We cannot in good conscience say they are independent even if they follow current regulations.

The Audit Committee’s compensation in stock options provides a clear incentive in maintaining a high short term stock price over the integrity of the financial reporting that they monitor on behalf the shareholders.

We meet time to time with management at road shows and conferences. We have to rely on their selective disclosure of what they decide to communicate to us. They are can be optimistic bunch even during trying times. They like to accentuate the positive in almost every circumstance. This process is known as “spinning.” We have to believe they are always being forthright with us. We hope!

Besides, if we get “too critical” we may face reprisals from companies. We require some access to them for our work. After all is skepticism worth losing our future income over? Go to the short sellers for that. They too are now being stigmatized.

As financial analysts we do the best we can under these circumstances. However, if a melt down occurs do not blame us. We rely on the audit opinions of the accounting profession, the work of Audit Committees, and the selective disclosure of management.

In addition the markets collective perception of the company is just that – perception. While the markets in theory are supposed to be rational, they often are not. It has been said that “perception of reality” and not reality itself is what drives people’s decisions. However, reality is often illusive especially given the facts presented above in this disclaimer.

As analysts we take a lot of finance courses. There is no guaranty, however, that the analyst writing this report has any meaningful work experience in the industry they cover.

With our above disclaimer, you should take any report issued by us on faith or rather just have hope that we are correct in our analysis. After all we rely on the effective work of others and the information they provide to us.

Written by,

Sam E. Antar (former Crazy Eddie CFO, convicted felon who ran circles around auditors, Audit Committees, and Wall Street analysts)


As a former writer of financial fairy tales, I sold people hope.

Jeff, like you "I am not making this up."

Jake Wolf said...

How do I get a job as an analyst for hire? I have no finance experience so that should put me ahead of the game. Salary requirements are 35k a year. Available immediately and am open to telecommuting from NYC.

BayStreetTrader said...

Man this remind me of a certain analyst at BMO Capital Markets. He had a price target of $5 US on Nvidia(NVDA) when it was trading at like $25 US. I am not sure exactly what he was thinking at the time. One day, he woke up and said "I'll upgrade it today and throw a $20 target on it." I think it was a wise move on his part...It's now trading at $37 US.

bgthej said...

Funny post Jeff, very amusing. If I was designing a system for the sell-side to operate on, the first two tenets would be to get rid of price targets and ratings. I'm not sure that any rational investor pays any attention to these meaningless opinions and ratings. So why force analysts to "take a hard position?"

One can still be positive or negative on a company's stock, but sell side analysts get nailed down into biases due to their ratings and targets because their egos tell them that those stated positions are somehow "right." Meanwhile, most good investors understand there are countless scenarios that could play out for a business or a market and the real value is in assigning those scenarios probabilities and associated values. Instead, sell-siders get pigeon-holed into a hard number that they say a stock is worth presently, which also by the way doesn't take into account the time value of money.

This kind of thinking is also the reason why 90% of portfolio managers regularly underperform their index. Turnover is too high and investors are too loss-averse, with psychological studies showing that investors routinely weigh losses much more significantly in their minds than gains. If as investors or advisors to investors we focused on a non-biased probability and value weighted process instead of outcome, the investment community would gain a lot more credibility over the long-run.

Until then, keep preaching the truth Jeff...

Gone to the blogs said...

You forgot reason 2.a: When I finally convinced my DOR to let me upgrade the thing, he made me put on a price target with roughly 15% upside to justify my "decision."

Also, I have to correct you on one point. When marketing in Appleton, I can assure you that the sales guy is either 1) making golf-related doodles on a sheet of paper, 2) outside the room on an "important call," or 3) asleep.

Sam E. Antar said...


Perhaps your you and your readers here can come up with a "boiler plate" analyst’s research report for Wall Street to follow that is candid and yet judgment proof.

Happy New Year to all and with great respect,

Sam E. Antar (former Crazy Eddie CFO and ex-felon)