Sell ratings proliferate with changes on Wall St.

By Matt Krantz
USA Today

During the bear market, Wall Street analysts could only say "buy, buy, buy." But just when the market is finally rising, analysts are dusting off the once taboo "sell" rating and using it on more stocks.

Yesterday, Merrill Lynch analyst Adam Quinton slapped a sell rating on AT&T's shares, citing cutthroat competition and sagging earnings. The sudden downgrade from "neutral" startled AT&T investors, who knocked the stock down $1.01 to $20.05.

But Quinton's switch has broader implications: The AT&T downgrade is a high-profile example of analysts' increasing willingness to use sell ratings.

These days, 10.5 percent of the ratings from Wall Street firms are "sells," says Thomson First Call. That's well above the 2.7 percent level at the same time last year and 0.9 percent in 1999, just before the stock market plummeted.

The $1.4 billion settlement between investment banks and regulators forces Wall Street firms to eliminate conflicts that can lead to tainted research. That's one reason sell ratings may be up.

But the rising sell ratings can also be a contrarian indicator. They're at their highest since 1987, which turned out to be the market's bottom, says Mitch Zacks at Zacks Investment Research.

A closer look at sell ratings reveals some changes on Wall Street:

• Some larger investment banks have more sells than many smaller firms do.

Smith Barney, J.P. Morgan and Lehman Bros. have sell ratings on roughly a quarter of the stocks they cover, the highest level among the 12 firms analyzed by USA Today. That's well above the 2 percent and 4 percent at WR Hambrecht and A.G. Edwards, which had the fewest number of sells.

Zacks says larger firms are under more political pressure to show they're taking the reforms seriously. The natural way to prove it is by having a large number of sell ratings, he says.

• Investment banks are slapping clients with sells.

Merrill Lynch downgraded AT&T even though the telecom firm hired it to manage its most recent offering of securities and has long paid it investment banking fees. And while only 7.7 percent of Merrill's recommendations are sells, 20.7 percent of those companies are clients.

• Analysts tend to slap sell ratings on stocks at the wrong time. That's why investors shouldn't take the rising sells too seriously.

"When sells get to high levels, it tends to be a lagging indictor," Zacks says.

Still, while the 10-fold increase in sell ratings shows that investment banks are paying attention, some say it must rise even further.

David Lichtblau of analyst tracker StarMine says at least 20 percent of a firm's ratings should be sell ratings, to show it's serious about reform. Says Gint Rimas, research analyst at First Call, "10.5 percent is still not that many sells."