Analysts Who Dare to Tell the Truth

On May 31, Stuart Linde, Lehman Brothers' gaming analyst, made a big bet: He downgraded Las Vegas -- publishing a negative report on the dimming prospects for the casino companies he covers.

The Strip is sizzling right now, but Linde expects visitation to fall short of capacity next year. Lowering his rating was not an easy decision.

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Like most Wall Streeters, Linde recognizes that there are consequences to telling the truth, especially when it's negative. Management of the targeted company is often miffed enough to keep the analyst out of the loop. Investment bankers at the analyst's firm fret about losing current or potential corporate business. Institutional clients often resent hearing ugly comments about their long positions.

"One minute they're angry that you're not objective, and then they're angry if you're not supportive of their long position," notes Gunnar Miller, semiconductor analyst at Goldman Sachs.

The bull market has only compounded the pressure to be positive and bring in banking work. "The analyst has become the focal point. He's going to get the deal sold," says Linde.

Still, even in this stilted environment, a handful of analysts stood out in our recent survey, Analyst Rankings -- Equity 2000, for their willingness to "tell the truth." Survey voters from money management firms recognized these analysts' willingness to be "an objective, independent thinker -- not held hostage to investment bankers or corporate management."

Analysts Who Stand Out at Telling the Truth
Analyst	Firm	Category	Overall Rank
Steven Binder	Bear Stearns	Aerospace & Defense	1st
Byron Callan	Merrill Lynch	Aerospace & Defense	2nd
Mark Connelly	J.P. Morgan*	Paper & Forest Products	3rd
Michael Exstein	Credit Suisse First Boston	Department Stores	1st
Roberta Goodman	Merrill Lynch	Managed Health Care	1st
John Herrlin Jr.	Merrill Lynch	Oil & Gas Exploration & Production	1st
James Kissane	Bear Stearns	IT Consulting & Services	1st
Stuart Linde	Lehman Brothers	Casinos & Gaming	2nd
Kevin McCarthy	DLJ	Computer Hardware	6th
Gunnar Miller	Goldman Sachs	Semiconductor Equipment	1st
Drew Peck	SG Cowen	Semiconductors	3rd (tie)
Vadim Zlotnikov	Sanford C. Bernstein	Semiconductors	10th (tie)

* Now at Credit Suisse First Boston

It's a balancing act. Analysts are caught in Wall Street's great Catch-22. On the one hand, they want to keep management, investment bankers and clients happy. But they also need credibility, or what they write will have no impact. The ones who survive with reputations intact are those who know how to tell the truth -- and still get the deal sold.

"Looking at the dark side in the face of overwhelming market psychology is like spitting in the wind," says Roberta Goodman, who has been an analyst for 12 years, and now covers managed health care for Merrill Lynch.

Early in her career, Goodman was openly skeptical of a merger between two health services companies. One of the companies attacked her publicly. "Naming me by name, the company managers told everyone that I was totally out of my depth," she recalls, "but three weeks after the deal closed, they admitted that it was a bad merger and they were going to miss their numbers in a big way."

To avoid such barbs, analysts have learned to express pessimism without sounding too pessimistic -- going from a buy to hold, for example. But Goodman worries that many new investors are "missing a sell-side decoder ring." No one should interpret a "hold" to mean the analyst blesses the stock, she says.

Drew Peck, semiconductor analyst at SG Cowen, says that huge analyst turnover contributes to the aura of optimism. "If you're a newcomer," avers the 16-year industry veteran, "the pressures are overwhelming to be completely supportive of every company you have a relationship with."

A case in point is Intel (INTC). Owned by virtually every mutual fund, Intel is "one of the untouchable names," says Peck. "My neutral rating on Intel for the past couple of years has been politically incorrect. Nobody wants to hear anything negative." (In fact, one voter gripes that Peck tends to be "pessimistic even when it isn't warranted.")

Nevertheless, Peck points out that Intel was one of the worst performing semiconductor companies from March 1999 to March 2000. While the stock doubled during that period, the semiconductor index was up 200%. "Relative performance is everything," he maintains.

Sometimes the lone truth teller is actually a bull. "Going against conventional wisdom tends to be difficult on both sides," says Vadim Zlotnikov, Sanford Bernstein's semiconductor analyst. Zlotnikov upgraded the entire semiconductor group in April 1998 despite the persistent Asian crisis. "When the companies are saying that things are dreadful, and a lot of people have sold the stocks, if you upgrade, you look foolish," he says. He looked less foolish when the semiconductor sector recovered. It gained eightfold by the end of 1999, leading at least one voter to cite his "excellent big picture work."

And by taking the heat occasionally, an analyst can gain precious credibility among clients and issuers. "People now know I'm not going to upgrade Mirage just for banking business," says Lehman's Linde, who admits he "took a lot of heat" last year when he downgraded Mirage Resorts (MIR) last year. He was vindicated when the stock subsequently halved.