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The Honolulu Advertiser
Posted on: Sunday, September 15, 2002

Stock analysts to grade themselves

By Rachel Beck
Associated Press

NEW YORK — Talk about accountability. Stock analysts now have to give themselves a report card of sorts.

Starting last week, they have to detail in their research reports their stock rating changes and price targets over the past three years and correlate that with what the stock price actually did over the same period.

Call it wrong time and again, and people will know.

Not that analysts' historical performance was a big secret. It was just nearly impossible to get a hold of if you were an individual investor, unless you kept a stash of old reports.

During the boom times, that didn't matter much. Small investors weren't so concerned about whether analysts had it exactly right. They were happy because prices kept going up.

Then stocks started to slide, and many investors wondered how this could be. Suddenly, analysts' calls seemed way off base. How could they say a stock was a strong buy when its business seemed to be falling apart?

Institutional investors could afford to subscribe to independent services that track ratings over time, so they had a better idea who got it right and who didn't.

But the resources weren't available for the little guy. Brokerage firms generally didn't provide past performance data in their printed research materials or in the investment tools available on their Web sites.

Most of the time, the only way for investors to get this data was through their financial advisers, who then had to put in a request with the analysts. And analysts weren't usually eager to comply.

People don't like the past to catch up with them, especially when it's riddled with bad calls. And as recent history has shown, analysts do make mistakes, sometimes big ones.

Now, analysts' stock ratings and price targets for up to three years and the stock price over the same period of time will be neatly laid out in a line graph in all research reports.

Analysts are required to provide this information for any stock they have covered for at least a year.

The new rule, effective Sept. 9, is part of a broader effort by the Securities and Exchange Commission and National Association of Securities Dealers to make investment research more trustworthy and credible.

Especially during the bull market of the late 1990s, many analysts gave only positive recommendations of companies they covered so that their firms could win investment banking business to do very lucrative merger deals and stock offerings. And they kept pumping up stocks even when they knew the businesses were failing. That left many unknowing investors, especially individual market players, holding on when they should have been getting out.

Although the new rule doesn't prevent an analyst from making wrong calls, it at least allows investors to study an analyst's past and then judge for themselves whether they want to base their buying or selling decisions on that analyst's views.

If an analyst keeps a buy rating on a stock for months even while it plunges lower, maybe that's not someone to trust.

The opposite is true, too. You might not want to follow the views of an analyst who only upgrades a stock long after it reaches its peak.

And having three years' worth of data will make it clear whether a bad call is the exception or the rule.

Investors might have been able to use this data to avert some big losses over the past few years.

Maybe those who followed the advice of former Merrill Lynch analyst Henry Blodget in the late 1990s would have been able to see how he kept buy ratings on high-flying Internet companies like eToys and Pets.com even though the stocks were in a free fall and their businesses were crumbling.