Analyst Watch: Don't be an analyst's sheep

5 min read

What happened to Intel shares Friday following a downgrade from Morgan Stanley Dean Witter analyst Mark Edelstone is a classic example of why today's stock market and its investors are headed not only in the wrong direction but in a dangerous one.

First, let's get the disclaimer out of the way.

I've never met Mark Edelstone. I can't say that I recall ever talking to the man. I do know that I've left numerous phone messages with him over the years for one reason or another and I'm almost certain he's never returned a single one.

I don't really care, either. There's always another analyst in the Rolodex.

He may be the best semiconductor stock analyst in the history of the industry. He may be a complete moron. I honestly don't know. And neither do you. This should concern us all.

Have an opinion on this?

Intel (Nasdaq: INTC) shares fell 3 1/8, or 5 percent, to 54 7/8 Friday morning after Edelstone cut the stock from a "strong buy" recommendation to "market outperform." That's the news. Nothing else of any significance happened to Intel, the chip industry or the market as a whole for that matter.

The blind leading the blind?

But long before noon more than 17.4 million Intel shares had changed hands. Intel's average daily volume is around 20.1 million shares. By the time you finish reading this article, Intel's volume will have blown right past that number.

The problem here isn't with Mark Edelstone or Morgan Stanley Dean Witter or any other analyst at any other brokerage house. The problem is with you, Joe or Josephine Investor.

Because there is so much information out there these days emanating from a million different sources -- including this very Web site -- it's almost impossible to make out even a single tree from the forest. So when someone who hopefully knows what he or she is talking about makes a declaration, you all line up like cattle at the slaughterhouse. Blind faith personified.

Call the broker, you decide. Get on E*Trade and buy or sell Company A or B because this complete stranger says so.

Well here's the punch line: Once you get past the impressive light show and the dancing bears, you'll find that analysts really only care about making their firms a lot of money and making themselves look good. And not necessarily in that order. Change a rating on a stock and people trade. Whether you buy or sell Wall Street collects commissions.

These analysts, more often than not, never worked in the industry they cover. They've almost certainly never run a company in their lives, much less one of the size and scope of an Intel or a Microsoft or an IBM.

Neither have any of the financial journalists or "pundits" that serve as your gatekeepers. And, yes, that includes me, too.

When follow-the-leader turns ugly

So here you have millions of investors selling shares of Intel, arguably one of the most powerful companies in the modern era. A company that earns $2 billion a quarter. A company that, depending on which market research firm you believe (see another sneaky gatekeeper), owns between 80 percent to 90 percent of the world's chip market.

Even Lloyd Christmas of "Dumb and Dumber" fame would understand this: Chips are pretty important to the technology world. Might be a good business to be in.

I'm not on the Intel payroll. I don't own any Intel shares. It's futile and pathetic to say, but I root against any monopoly on principle alone. But you can't argue with Intel's success.

So let's go back to the beginning.

Investors are unloading these shares mainly because one guy at one firm says "it appears that technical issues will cause the company to delay the introduction of 0.18-micron versions of its Pentium III microprocessors."

Maybe. Maybe not. Maybe Edelstone is real tight with the Intel brass and knows what he's talking about. Then again, maybe not.

But in this same release, which mentions that Edelstone cut Intel's fiscal 1999 earnings estimate from $2.35 a share to $2.25 and its 2000 earnings from $2.60 a share to $2.55 a share, there's this confounding little comment.

"(These technical issues) are likely to lead to a lower-than-expected average selling price for Intel's overall MPU portfolio. Still, Mark believes that Intel remains undervalued."

Read that sentence again.

Now what is that? That's what Morgan Stanley Dean Witter said in its research note.

On one hand he's downgrading the stock and cutting its earnings estimates, but on the other hand the stock is undervalued. Does this make any sense to anyone?

Everyone wants to be Nostradamus

What Edelstone (and he's not the only analyst ever to do this) is really doing is setting himself up to look like a prophet, a real boy wonder of Wall Street.

He's cutting Intel in June, the heart of the slowest time of the year for chipmakers and technology stocks in general. He's slashing a whole dime and nickel per share off the earnings estimates for fiscal 1999 and 2000, respectively. How daring.

And he's doing this when Intel is trading a good 25 percent lower than its 52-week high set in January.

But in September, or maybe even a bit ahead of Intel's third-quarter results, you can bet Edelstone will be one of the first analysts to upgrade the stock. That way, he can say he called the bottom and called the stock on its way up.

There aren't many guarantees in life but I'm going to share one with you now: There's no way Morgan Stanley Dean Witter has Intel shares rated "outperfrom" or "neutral" by this fall.

It's such a predictable pattern.

Come August or September the press release will laud management's ability to overcome whatever these technical problems supposedly were. Morgan Stanley Dean Witter now says it's time to buy Intel. They're a proven earnings machine. Or words to that effect.

This stuff happens all the time.

For what it's worth, 29 of the other 38 experts following Intel for one brokerage firm or another rate the stock either a "buy" or "strong buy." You can bet several of them are kicking themselves for not dreaming up this little maneuver themselves. Or at least not acting on it as quickly as Edelstone did.

Besides, who is going to remember what Mark Edelstone said about Intel in June come November? Mark Edelstone will. His bosses will. Some of his clients might. That's about it though. You'll be too busy chasing the next upgrade or downgrade.

So the next time some analyst at some prestigious brokerage house upgrades or cuts a stock, remember that these guys have an agenda too -- more trades equals more commissions.

Don't kid yourself. Investing in the stock market is just a more sophisticated and acceptable form of gambling. And these analysts are shilling for the bookies.

Don't be a sucker.