Wien: Fade the Sell Side

by StockJockey

Monday, June 18, 2007 - 9:40 am

Financial bloggers might not be the only folks you want to consistently fade.

How about the Street’s Sell Side analysts?

In would appear that both groups are fighting the bullish tide. According to data compiled by Bloomberg, Hold recommendations outnumbered Buy recommendations in February. Contrarians might want to take note. Indeed, seven years ago the market was beginning a long and brutal decline. And at that moment buys outnumbered holds by a 3-to-1 margin.

Byron Wien spent a long career on the Sell Side before wising up and joining Art Samberg at Pequot Capital Management, the well-known Connecticut based hedge fund. And he is taking a potshot at his former associates:

Byron Wien, chief investment strategist at Westport, Connecticut-based hedge fund Pequot Capital Management Inc., is convinced analysts remain a contrarian indicator just as they were in March 2000, when stocks began their 2 1/2-year plunge and buy ratings exceeded holds 72.7 percent to 25.4 percent.

``Analysts are generally not right,’’ said Wien, who left Morgan Stanley in 2005 after 20 years with the firm. ``That’s the sad irony of this business. When everybody’s on the positive side, it’s usually a time of danger. When everybody says `hold,’ it’s probably time to take a hard look.’’

Wien estimates the S&P 500 will reach 1600 at the end of this year, a 13 percent increase from Dec. 31. The measure has risen 8.1 percent to 1532.91 so far in 2007.

But the news is not universally bleak. The big brokers buy lists have been outperforming the S&P 500 for the past two years, and analysts are no longer beholden to bankers to set their compensation.

Investors who mimicked both the buy and sell recommendations of seven of the 10 brokers beat the S&P 500 since June 2005, according to Investars. That compares with two out of 10 from June 2003 to June 2005.

Bear Stearns Cos. and Lehman Brothers Holdings Inc. underperformed while UBS tracked the market’s performance, trailing by only 0.04 percentage point during the past two years. Merrill added the most value—23.9 points—followed by Piper Jaffray’s 20.4 points and Credit Suisse’s 10.8 points.

Five years ago, analysts ``were a good contrarian indicator,’’ said John Eagleton, president of Investars. Now, they ``are being compensated based on performance, so their energy and their intellectual insight is going into generating good buy, sell, hold recommendations.’’

Sooner or later the bears will have their day. Unless they cave and flip-flop.

Wall Street Analysts More Bearish Than Ever; More Accurate, Too
Bloomberg
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The content contained represent the opinions of 1440 Wall Street. 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. No position in securities mentioned