March 8, 2011
Financial Analysts and Charlie Sheen: Taking Us Back to the Future?
Deutsche Bank media analyst Doug Mitchelson showed, in my opinion, why investors need to take a closer look at analysts' recommendations.
This, from the Los Angeles Times:
[CBS Corp. Chief Executive Leslie] Moonves made it clear he wasn't interested in discussing whether CBS would be missing its No. 1 comedy, "Two and a Half Men," next season. Perhaps he was feeling burned by his comments at the Morgan Stanley investor conference last week, when he said he would like to see the return of the show's rogue star, Charlie Sheen. On Monday, Moonves told the conference audience: "We are not going to talk about "Two and A Half Men " -- yet."
Deutsche Bank media analyst Doug Mitchelson tried, however, when Moonves boasted that some of the network's cost-containment strategies involved killing off high-priced actors in prime-time shows.
"I wonder if you have successfully changed out a lead actor in a show before," Mitchelson asked.
Moonves cleared his throat -- twice.
"OK, I'm sorry. I promised no Charlie Sheen questions," Mitchelson said.
Analysts (like reporters) often make promises to cover (or avoid) a certain range of issues when conducting an interview. For reporters, it's about getting the story they can publish, and that often means having good relationship so they can get the "scoop." For analysts, it's also about building relationship so they can get the inside track on company information. However, analysts' role is to provide information about the company so that investors can make better informed decisions.
For a reporter, when something goes wrong -- think, perhaps, Tiger Woods -- when the public figure is ready to talk, that reporter who has earned trust is likely to get the call. And the scoop. For an analyst, I seriously doubt that's the call that is going to happen. More likely, the call will go to an analyst with good news or just to raise the profile of the analyst. I fail to see the upside -- public information needs to be made public anyway.
Maybe I am being too sensitive to this. After all, I just got done teaching Enron, and reviewing the abject failure of analysts in that context always raises an eyebrow or two. As Forbes.com reported in 2002:
In short, the analysts are all different, but in exactly the same way.
The Governmental Affairs Committee held the hearing to inquire into what committee members called "inherent conflicts of interest" between analysts who recommend stocks and investment bankers who advise companies and sell securities, as well as the possible too cozy relationships between the analysts and the companies they cover.
Despite many reports to the contrary, all of the four Wall Street analysts testifying said they felt no pressure either from their own firms or from Enron to tout the stock. Rather, they all believed, based on public information and their own analyses, that Enron's "core business" was sound and profitable and that its business model was "portable" beyond buying and selling energy to other markets.
The analysts say they reached their conclusions separately. But, even in a universe where two-thirds of the recommendations are "buy," the mathematical odds of a dozen analysts all reaching the same conclusion independently are less than one-in-100.
I'll always take Michael J. Fox over Charlie Sheen, but in this case, Back to the Future is not a good call.