ANALYST WATCH: Thanks for nothing

Engage and 24/7 Media both delivered some devastating news this week, sending both stocks into a predictable plunge. While a flock of analysts cut the stock Thursday, only a handful bothered to warn investors ahead of the bad news.

This happens all the time, begging the question of just how much value these guys are providing to clients and, for that matter, the companies they follow.

This pattern of analysts lowering estimates and downgrading stocks after these companies issue press releases is disconcerting because these men and women are supposed to know the financial health of the companies they follow long before everyone else does.

Again, as I've been complaining throughout the three years I've been doing this column, we have clear-cut examples of analysts reacting to the news rather than helping their clients proactively buy or sell the stocks they follow.

I'm not suggesting that every analyst should or could know every detail about every company he or she follows well in advance of a company press release.

The signs were there

But in the cases of Engage (Nasdaq: ENGA) and 24/7 Media (Nasdaq: TFSM), the stink was in the air long before anything hit the fan.

On Wednesday, Engage warned that it now expects to lose around 25 cents a share in the quarter on sales of between $40 million to $42 million.

Analysts were expecting it to lose 20 cents a share in the quarter.

It also named Anthony Nuzzo as its new CEO, replacing the outgoing Paul Schaut.

Worse, it now expects to lose around 25 cents a share in its first quarter on sales of between $40 million to $42 million, down from the $66.7 million it recorded in the fourth quarter

First Call Corp. consensus expected it to lose 20 cents a share in the quarter.

Now here's the interesting part:

When Engage topped analysts' estimates by 14 cents a share in its fourth quarter back in September, the stock gained ground even though it said it was laying off 175 employees and consolidating its five business divisions into two.

On Sept. 21, one day after the earnings and layoffs were reported, Chase H&Q analyst James Pettit said that greater-than-expected software sales with higher margins "more than offset" the slowdown in online advertising sales.

"Conclusion: Mixed results yield positive bias," he wrote in a research report. "We believe near-term uncertainties on financing & P2P are now reduced and Engage remains well positioned with an attractive growth profile. Maintain BUY rating."

On Thursday, Pettit cut the stock from a "buy" rating to "market perform" and lowered his revenue estimates for 2000 and 2001 by 10 percent and 25 percent, respectively.

"Given the difficult media sales environment and poor visibility, we are adopting a 'wait and see' approach and moving to the sidelines with a Market Perform recommendation," he wrote.

Do the research

Compare that analysis to what Banc of America Securities analyst Chris Hansen said back on Oct. 31 after the company filed its 10-K report with the SEC and before it issued Wednesday's warning.

"As disclosed in Engage’s 10-K filing, we believe the company is experiencing significant softness in its media and media management businesses, with both likely trending well below our current estimates," he wrote in a research note. "Based on our recent discussions with numerous private and public Internet ad networks, advertising agencies, and online media companies, we continue to believe that the online advertising environment remains very challenging, with the most significant weakness prevalent in the low-end ad inventory, which accounts for the bulk of Engage's media revenues."

Folks, that's what an analyst is supposed to do.

Hansen actually read the 10-K, recognized the obvious problems Engage was facing and maintained his "market performer" rating.

Every single Engage analyst had the opportunity to make a similar report or advisement to its clients between that fourth-quarter earnings report in late September and Wednesday's unsavory warning.

Only two other analysts bothered to issue research reports in this period.