warned Wednesday of an earnings shortfall, the first thought to cross some minds was that somebody at the big appliance maker and somebody at
had been talking out of school.
Prudential analyst Nicholas Heymann had cut his Whirlpool rating to sell from hold Monday, saying
decision to exit the appliance-retailing business would hurt Whirlpool and give competitors an edge. A sell rating is a rare thing on Wall Street: At Prudential, only three of the 750 or so stocks under coverage have them. You see a sell rating, you stand up and take notice. If it's on a stock you own, you start making deals with God. Whirlpool slid 11% Monday on Heymann's note.
Then, when the same company comes out with an earnings warning, maybe you start to wonder. In the chummy world of corporate America and Wall Street, analysts and big investors have often been privy to material information on companies ahead of everyone else. That's one of the reasons the
Securities and Exchange Commission
recently voted to ban selective disclosure, the practice of telling only certain people, such as analysts, about important information.
It seems unlikely that Pru got inside dope from Whirlpool management, however. For one, Prudential doesn't have a particularly tight relationship with the company. It hasn't done any recent underwriting for Whirlpool, for instance. It had rated the stock hold, whereas
had buy ratings. If you're going to selectively disclose bad news, why not selectively disclose it to the people who like you? Maybe they'll give it a good spin. (In a conference call today, Whirlpool officials said the Prudential downgrade was "absolutely lacking in credibility.")
The note Pru put out accompanying the downgrade stinks not of selective disclosure, but of honest-to-goodness research. It says the North American appliance retailing space will shrink by 9% to 10% with Circuit City's withdrawal from the field and that it could shrink by as much as 14% if
follows Circuit City's lead. Moreover, the only new appliance-retailing spaces coming on line are at
, neither of which sell Whirlpool products. This is the kind of stuff that comes from kicking tires and checking out stores, not playing golf with the CFO. Heymann, out of the office Wednesday, wasn't available to comment.
After trading down as much as 16%, shares of the Benton Harbor, Mich., washing-machine maker closed up a quarter Wednesday at $38.13. Clearly, the Prudential downgrade had already taken its toll on this stock, which is near its 52-week low.
Be that as it may, there was a sense on Wall Street that the Prudential downgrade may have actually forced Whirlpool to rush out an earnings warning. Even though the new disclosure guidelines haven't yet taken effect (the selective-disclosure ban goes into effect Oct. 23), Whirlpool may have moved quickly in order to make it absolutely clear that there was nothing improper going on, some Wall Streeters said.
"The impression one might get from a sell report is that the analyst knows something the rest of the Street ought to know," said Charles Crane, market strategist at
Spears Benzak Salomon & Farrell
. "I would not be surprised if the company attorney decided they had to confirm or deny whatever factors contributed to the analyst's negative opinion."
A Whirlpool spokesman called Wednesday's warning "an independent event" from the Pru downgrade.
On the upside, the selective-disclosure ban may also mean we will begin to see more examples of independent research.
"It's really going to change things," said Larry Rice, chief investment strategist at
. "Maybe we'll get some good, creative, original research that isn't just the company line."
Anecdotally, it seems like the shift has already begun. In the past week, there have been two big downgrades that punished a stock: Pru's Whirlpool downgrade, and a
downgrade by Lehman analyst Steven Levy