THE DAY AHEAD: Revenge of the "sell" rating

Larry Dignan
3 min read

COMMENTARY--A funny thing is happening as the market for new stock offerings remains weak--the dreaded "sell" rating is making a comeback.

Sure it's still early in the "sell" rating trend, but it was hard to miss Prudential Securities analyst Mark Rowen's recent downgrade of Amazon.com (Nasdaq: AMZN). Rowen already had a "hold" rating--the equivalent of a sell these days--but figured he'd clarify things a bit with a "sell" rating. The rating is notable because you normally don't see "sell" ratings for any stock above $1.

Why would Prudential go out on the limb with a "sell" rating? There's no underwriting work to be had so the typical conflict-of-interest problems disappear. If Amazon raises more cash with a stock offering--something that's possible--it clearly isn't going to ask Prudential to be an underwriter.

These days, the risk of berating Amazon and hurting your firm's underwriting revenue is almost nil. You'll still see much more measured comments from the likes of Morgan Stanley and Goldman Sachs when it comes to Amazon because those firms would gain from any attempt to raise cash for the e-tailer.

It's apparent to anyone slightly skeptical that analysts habitually have "buy" ratings on stocks that stink. Why? These guys are paid to say nice things--especially when the firms they work for take fees from the companies they cover. Only when a company goes bankrupt or completely implodes do you see a "hold" rating or lower. Critical Path (Nasdaq: CPTH) had to boot its management team amid accounting shenanigans just to get a "sell" rating. NorthPoint also nabbed its share of "sell" ratings, but had to run out of cash to get them. Ditto for eToys (Nasdaq: ETYS).

Now that there are a lot of companies that have no shot at raising additional capital, analysts may just call 'em like they see 'em.

Rowen, who also gave Barnesandnoble.com (Nasdaq: BNBN) a "sell" rating last month, took a "sum of the parts" approach with his analysis and valued Amazon's pieces. He dispelled worries that Amazon will face a credit crunch, but noted that the company's stock could fall more to somewhere between $6 and $10.

Two years ago Rowen could have been canned for even thinking that Amazon deserved a "sell" rating. He would have been punished and forced to write "Amazon deserves a premium because of the lifetime value of a customer" 1,000 times on the chalkboard.

Are we being a bit optimistic about this "sell" rating trend? Probably, but there is evidence that analysts are at least thinking about the dreaded "S" word.

"Neutral" ratings, the equivalent of "sell now," are popping up everywhere. Brokerages are quickly dropping coverage of stocks that have fallen. The dreaded "sell" ratings can't be too far behind.

But some analysts are still having trouble saying the "S" word. Ask Robertson Stephens analyst Lauren Cooks Levitan. She recently gave PeoplePC (Nasdaq: PEOP) a "no rating" after the company's most recent earnings report. Obviously, Levitan, who works for a brokerage that served as a PeoplePC underwriter, just couldn't bring herself to downgrade PeoplePC from a "buy" to a "sell."

So instead of a "sell" rating, Levitan downgraded PeoplePC to a "no rating" rating. What's "no rating" mean? It means Levitan figured it was easier to say nothing than say "sell." But that's what counts for progress in a world where analysts can't pronounce that simple one-syllable word that starts with an "S."TDAIN

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