UBS trips, and AMD gets a round trip
1. Advanced Micro Gets Micromanaged
In this week's Unfortunate Timing competition, UBS analyst Tom Thornhill is the undisputed champion.
On Monday, Thornhill decided that the recent decline in the stock of chipmaker
Advanced Micro Devices
(AMD - Get Report)
had landed AMD in the realm of a fair valuation, near his $20 price target.
So Thornhill upgraded the stock from a reduce rating to a neutral. Of course, he pointed out that any significant drop in AMD's flash memory revenue wouldn't be good for the stock.
How right he was.
Later that day, AMD announced that flash memory sales, previously forecast to be flat at worst, were now expected to drop in the fourth quarter, resulting in an operating loss.
AMD shares got hammered Tuesday, plummeting 26% to $14.83. And on Tuesday -- one day after raising his AMD rating from reduce to neutral -- Thornhill cut the rating from neutral to reduce. He cut his price target as well, from $20 to $12.
Asked about the round-trip rating changes, Thornhill acknowledges his "unfortunate timing," but he says the reversal was a byproduct of UBS' proprietary system for managing stock ratings.
If a UBS analyst has a reduce rating on a stock, Thornhill explains, and the stock's price dips below the analyst's target price, the system flags the stock for a rating change. If you don't change the rating, he says, the system will suspend coverage on the stock.
So after AMD started closing below Thornhill's $20 price target last week, the analyst says he had a limited amount of time to change the stock's rating -- which he had to change again after AMD's preannouncement.
To the system's credit, Thornhill says, it encourages a constant review of stocks and a heightened sensitivity to valuation and return.
But given the volatility of the semiconductor stocks he follows, "trying to maintain the discipline of the system can be challenging," Thornhill says.
"I wish the system allowed me a little more latitude," he says. "Occasionally with volatile stocks like AMD, you get tripped up like this."
2. PurchasePro Files in Courage
You think crime doesn't pay? Maybe it just doesn't pay enough for all the hard work that goes into it.
That's what we decided this week after reading the
Securities and Exchange Commission's
civil complaint against five former executives at America Online, now part of
(TWX - Get Report)
, and defunct business-to-business software company
The SEC's challenging charges
The SEC says the executives, among other misdeeds, conspired to artificially inflate the revenues of PurchasePro in 2000 and 2001, and to otherwise misrepresent its business activities.
Though the result may be simple -- a few extra million dollars in sales over two quarters -- the actual process is pretty complicated, the SEC suggests. Pulling off a fraud, according to the SEC's allegations, required a lot of work that might never occur to someone who hasn't thought clearly about how to pull off a fraud.
To give you an idea of the challenges involved, let's look at a few of the alleged elements of the alleged fraud: Someone had to take a document called a "Statement of Work," take another piece of correspondence previously signed by an AOL employee, then cut the signature out of the one document and paste it onto the other. Someone had to write the letters "SVP" under the pasted signature. Someone had to copy and recopy the document to hide the forgery. Someone had to give scripted, misleading answers to PurchasePro's auditors on a conference call.
To recognize revenue in a certain quarter from another deal, someone had to change the date on a fax machine.
And in an effort to avoid detection of one suspect deal, someone had to shred a bunch of documents, burn the shreds and then rake the ashes into his back yard.
After reading all of these allegations, we're left with one burning question: At what point would it have just been easier for PurchasePro to sell stuff rather than fake it?