The Analyst Who Saved My Life

Alison Zomb

Douglas Augenthaler didn't quite know what he was in for.

A longtime skeptic on Waste Management, Augenthaler grew wary about the company's future when he saw some nasty postings on Yahoo! message boards and was convinced they were the words of insiders. Alarmed, the environmental services analyst at CIBC World Markets conducted his own survey of several WMI facilities in February 1999. His findings: problems at every level, from truck routes and pick-ups to accounting and computer systems.

Augenthaler did what analysts are supposed to do -- he issued a report to his clients, warning that Waste Management was careening out of control.

The trouble was, most of the other analysts following WMI were bullish. They became "borderline violent" when he broke ranks, Augenthaler says. Michael Hoffman of Credit Suisse First Boston called Augenthaler's pricing projections "foolish" and "unbelievable" in an article in The Wall Street Journal. Mari Bari from Deutsche Banc Alex. Brown described Augenthaler's bulletin as "inaccurate and/or misleading," the Journal article said.

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Augenthaler was eventually vindicated: A disappointing second quarter was followed by disaster over the next several months as WMI reduced earnings expectations, admitted accounting irregularities and underwent major management changes. Some institutional investors were thankful. "Great call on not getting snookered by WMI's discredited, fired management!" raves one backer of Augenthaler in the comments submitted to our Analyst Rankings -- Equity 2000 survey.

But the drubbing Augenthaler received shows that it's not easy being the lonesome voice of doom, warning investors to dump a stock while others still are trying to get clients to buy. And it's not just the Wall Street competition that gets steamed. Analysts who fight the bullish tide are sure to face intense pressure from investors, company executives and even their own bosses if their firms are hoping to get investment banking work from the covered company.

No wonder so few analysts were regarded as "lifesavers" by the institutions that responded to the TSC Analyst Rankings survey. Indeed, of the six attributes on which voters ranked analysts in our survey (see our separate story on our methodology), the ability to "save me from disaster" proved most elusive. None of the analysts whom voters ranked tops in our 63 industry categories received a perfect score on this trait, which we defined as being "sufficiently pessimistic when warranted."

Still, 10 analysts scored high on this attribute, setting themselves apart with their willingness to be negative despite the consequences. In interviews, they point out that contrary to what you might assume, it is often the investors -- not the companies -- who have the harshest reaction to the bad news.

Lifesavers Analysts who scored best at "saves me from disaster"
Analyst	Firm	Category	Overall Rank
Douglas Augenthaler	CIBC World Markets	Environmental Services	2
Richard Bilotti	Morgan Stanley Dean Witter	Movies & Entertainment	1
Steven Binder	Bear Stearns	Aerospace & Defense	1
Michael Exstein	Credit Suisse First Boston	Department Stores	1
John Herrlin Jr.	Merrill Lynch	Oil & Gas Exploration & Production	1
Brett Hodess	Banc of America*	Semiconductor Equipment	4
John Mahedy	Sanford C. Bernstein	Integrated Oil & Gas	4
Ronald McIntosh	Fox-Pitt, Kelton	Life & Health Insurance	1
Dan Niles	Robertson Stephens**	Computer Storage & Peripherals	4
Marie Rossi	Morgan Stanley Dean Witter	Health Care Distributors & Services	2

* Now at Merrill Lynch ** Now at Lehman Brothers

"Being negative is a tough spot for an analyst to be in, but it's also a tough call for a client to hear," says Augenthaler, who now covers Internet services and technology. "If I issue a buy rating, a portfolio manager can choose to ignore it and it's no skin off his teeth. On the other hand, if I turn negative on one of his holdings, he may see me as working actively against him and start to view me as the enemy."

Facing the choice of ostracism or honesty, many analysts have tried to tread a middle ground, maintaining a discreet silence in public, but privately warning clients of changes. Instead of issuing an outright sell, and risk being cut off from company execs, analysts may keep a neutral rating or even a buy and privately urge clients to dump a stock. "Telling a client what's a real neutral and what's a sell is something that goes on behind the scenes, where it's better tolerated," says Augenthaler.

Marie Rossi

Marie Rossi, a health care analyst at Morgan Stanley Dean Witter, says sophisticated institutional investors realize that ratings are always secondary to an analyst's verbal comments. For example, Rossi says that if she sees the price of a stock that she rates outperform rising too rapidly, she might suggest that her clients lighten up on it -- without ever adjusting her published rating. These "offline" insights get passed along on the phone or in one-on-one meetings. Small investors don't get these messages.

Rossi has gone public with her concerns, however. She predicted a Y2K slowdown for health care distributors and health care information services in the fall of 1998 and, at the same time, predicted trouble for the McKesson/HBOC merger. According to the survey comments of one grateful client, Rossi "deserves major credit for saying what most feared most: [that the] health care information services sector was going into a death spiral."

At the time she made the call, Rossi absorbed the wrath of many institutional clients. "Investors don't necessarily appreciate it when you tell them what you think," she points out.

Investor reaction seems to depend on how much control an analyst is perceived to have over stock prices. If investors or companies believe that a downgrade will cause an instantaneous price plunge, they complain bitterly. But cautious analysts maintain they're only the messenger.

Steven Binder

Steven Binder, aerospace and defense analyst at Bear Stearns, tries to ease the pain through presentation. If bad news is delivered in a straightforward, well-balanced manner, clients generally receive it well, says Binder, who in the past year has expressed caution on Raytheon (RTNa Quote), Lockheed Martin (LMT Quote) and Boeing (BA Quote). What really angers clients, says Binder, are controversial calls that are speculative, lack substance and appear calculated to create a stir for the analyst or firm.

Dan Niles

Dan Niles, a computer storage and peripherals analyst who recently joined Lehman Brothers from Robertson Stephens, agrees that the play-it-straight course is best. Then clients don't confuse the messenger with the message. "I'm like the weatherman," he says. "It's going to rain whether I tell you it is or not."

Niles made his mark last year with negative calls on Dell (DELL Quote) and Intel (INTC Quote).

Still, he notes, it's a lot easier to give the folks a rosy forecast. Says Niles: "It's more fun being bullish."

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