THE DAY AHEAD: Are 'sell' ratings making a comeback?

Larry Dignan
2 min read

Wall Street analysts, known to be an optimistic lot, seem to be uttering the "S" word a little more often these days. Sell ratings are almost unheard of, but a few analysts are trashing tradition and saying how they really feel about the companies they cover.

The most notable downgrade for the tech sector this week was ING Barings' downgrade of Micron Technology Inc. (NYSE: MU) to a "sell" from a "hold." Micron shares didn't budge, but the use of the "S" word was shocking.

Should "sell" ratings be used more?

ING analyst Peter Wolff wasn't available for comment, but his report on Micron said it all. "At this point we feel there is a growing probability that Micron's stock could drop to the mid-$20s as DRAM (dynamic random access memory) prices continue to decline and investors begin to agree with our argument that there is no rationale holding up the stock," wrote Wolff. "The question is who is going to notice the King's clothing first."

For the record, no one is listening to Wolff. Micron shares closed at 38 3/4 on Thursday.

The current conventional wisdom dictates that a "hold" is the equivalent of a "sell." But since many analysts belong to firms that were underwriters for the company they won't say "sell." In fact, a company can be grossly overvalued, issued 20 profit warnings and still get a "buy" rating.

First Call Corp. estimates that two-thirds of analyst ratings are "buys" and with the remainder being "holds."

To be fair, many analysts are mostly just optimistic about the companies they cover. Analysts wouldn't cover companies they don't like.

But there are some lemons. Take Advanced Micro Devices (NYSE: AMD). The company churns out more earnings disappointments than chips, but 21 analysts won't call AMD a "sell." Instead, AMD gets the "hold" rating from all 21 analysts.

Now that's optimism.

Unless you've been on another planet, you would know AMD is a dog of a stock worthy of "sell" ratings. AMD better hope this "sell" thing doesn't catch on.

However, "sell" ratings are getting popular in other sectors.

Those banking analysts have been hurling "sell" ratings with ease. CS First Boston issued "sell" ratings on multinational banks such as CitiGroup. Following a profit warning from First Union, some analysts cut the stock to "sell."

It's unclear whether the "sell" ratings will catch on, but if they do a lot of tech companies could be in trouble.

Companies like AMD and Peoplesoft (Nasdaq: PSFT) could quickly see "sell" ratings.