Back on Nov. 3,
Deutsche Bank Alex. Brown
analyst Brian Modoff raised his price target on
to 250 from 225. The stock had closed the previous session a hair below the old target, but Qualcomm had just released the latest in its string of strong quarterly earnings reports. Much more importantly, it had set plans for a 4-for-1 split, a clarion signal of a new wave of momentum.
Qualcomm immediately blew past 250. So, two days later, Modoff raised his target to 320, without making any earnings-estimates revisions.
You can call it the floating price target, the hideous progeny of momentum investing. The incredible performance in certain technology and Internet subgroups has been reconciling the market's oldest sparring partners, technicians and fundamentalists -- and, in the process, dramatically changing the standards by which some analysts construct valuations.
Don't Fight It, Baby -- Feel It
"Analysts have become momentum analysts," says Hugh Johnson, chief investment officer at
. "Technicians identify momentum, and that's why they've been so successful. But I like to see momentum confirmed by some fundamental views from analysts. I've learned that the fundamental views of analysts have changed to catch up with the momentum of stock prices."
Dash down some thoughts on our Nasdaq board
It's an extension of a longstanding problem that few on Wall Street like to talk about, especially on the sell side, where the integrity of analysts' coverage has long been compromised by competition among their employers for underwriting deals. Now, with the
Nasdaq Composite Index
lately up some 64% on the year -- and many companies up much, much more -- the pressure to steer big clients toward the market's superperformers is getting ever more intense.
"The strength of the technology sector makes an analyst very gun-shy about recommending a sale," Johnson says. "And I can't blame them. There's nothing that would make you feel more foolish than having recommended the sale of a
The example of Jonathan Cohen serves as a cautionary tale for analysts thinking about de-friending the trend. Cohen, while at
, alienated many with his infamous bearish call last December on
, which was trading at 289 on a huge updraft from the price target of 400 set the previous day by Henry Blodget, then at
. Cohen countered with a 12-month target of 50.
In just weeks, and after splitting 3-for-1, Amazon had reached 160, or 480 on a presplit basis. Cohen left voluntarily for
in February, but no one could miss the poignancy of Merrill's choice of replacement: none other than Blodget himself.
Cohen may be proved right eventually -- but not for quite some time. Amazon, which has since split again, closed Thursday at 103 5/8, or 619 7/8 based on the number of shares outstanding when the analyst made his 50 call. It gained 17% after
set a price target of 160 on the stock.
Needless to say, no one knows exactly how much the company is worth.
"Statistics can be manipulated to serve any purpose," says Scott Bleier, chief investment strategist at
. "But the fact is that if you're an analyst and in a hot area, you're a hero and can raise price targets all you want and the public will believe you."
Don't Worry About the Multiple
From where some observers are standing, none of this really matters.
"Stop worrying about high P/Es," advises Robert Robbins, market strategist at
and an unwavering believer in the technology juggernaut. "If you want to buy the highest quality growth, you've got to pay up for it in a high P/E."
"The bald-faced truth," he continues, "is that you don't really look at P/Es as long as you don't have some upsetting economic factor that would hurt them, such as rising inflation. In the absence of something like that, free enterprise forces work their course without big vulnerability."
Give Robbins this: He has guts. That sort of attitude requires a lot of confidence in many uncertain things. The economy must extend its soon-to-be unprecedented growth cycle years into the future. Inflation, which ravages projected earnings, must remain in abeyance despite that booming economy. And companies must maintain the stellar growth rates that have prompted their current valuations, a task that can become increasingly difficult as firms mature.
True faith rarely admits that kind of scrutiny, of course. But no matter. Sometimes making money requires no more than the technician's belief that trends will tend to persist. Momentum, with the help of momentum analysts, can create huge opportunities for some investors.
"This market has been very forgiving at making new highs," Bleier says. "Short-term investors who can pull the trigger very quickly and move in and out can make a bloody fortune.
"But if the long-term investor chooses to take a position long term in the middle or the end of one of these run-ups, chances are they're bagged."
Ironically, it's the long term whose spirit must be invoked to support the valuations of the market's hypergrowth stocks.