Arco and the Analysts

Cramer examines why analysts were blind to the notion of this takeover.
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So I was supposed to be long Arco (ARC) - Get Report now, was I? Yeah, I looked at Arco several times in the past few months, but always with one eye toward stock loan.

You see, almost every broker at every major firm had huddled with his or her oil analyst, and the conclusion each had reached was: "You gotta short this Arco. It can't pay the dividend."

I never did. I figured these guys would rather sell the company than cut that dividend, and now it looks like that's going to be a prescient analysis.

So why weren't people recommending it? Frankly, analysts are perpetually blind to the notion of takeovers. They tend to dislike it even when you ask them about such events. When I made the rounds on Arco a few months ago, mentioning that I thought it could be taken over, the analysts were incredulous. They were united in saying that you could not own it for that.

It's always been like this in the business. I have hit a few large takeovers in my time, but analysts urged not one of them to me. Why is the process so flawed?

For the most part, it is because analysts have to get through an investment policy committee at their firms that demands improving fundamentals as the price getting on the list. Arco's fundamentals were deteriorating, not improving. Few analysts expect Arco to do as well this year as it did last year. That's the kiss of death to an investment policy committee.

Can you invest contrary to that method? Of course. But with one big caveat. It is very hard to stay long through a series of number cuts and earnings disappointments. Unless you are so certain that a company is worth too much to some other company, you might end up having to wait longer than you like and suffer through further deterioration of fundamentals.

That's why I wasn't long Arco this morning for the big hit. But I wasn't short it either, something I will be eternally grateful about.

Random musings:

It is hard to game today's

Journal

. I had thought everyone in the universe had picked up that

eBay

(EBAY) - Get Report

was going to get new competition from

Amazon

(AMZN) - Get Report

. But here it is, the No. 2 story in today's paper. Guess I have to suffer through another round of eBay knockdowns.

Didn't buy

Barron's

this weekend; read it online. I don't know why anyone would buy Barron's when you basically get it for free online. I know if I were subscribing or buying it, I would think twice if I owned a computer. Great way to save!

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long eBay, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

letters@thestreet.com.