Cheerleader Analysts Shaft Apple, Investors

NEW YORK ( TheStreet) -- Before Monday's open, Apple ( AAPL) announced launch-weekend iPhone 5 sales of more than 5 million.

While "plunged" would be too strong a word, the stock dropped considerably in the premarket and at the open.

You can link several direct causes to the downside -- the supply chain, the riot at Foxconn in China and whatever may or may not be going on with sales.

That said, "we" ignore the bigger picture implications of this noise. It doesn't matter whether analysts were "right" or "wrong" on iPhone 5 numbers. This story provides the opportunity to consider fundamental flaws existing in the relationship between Wall Street analysts, the media and investors.

Sterne Agee analyst Shaw Wu riffed wise in a note picked up Monday morning by Barron's: "We find it unfortunate that some analysts continue to publish irresponsible estimates without taking into account realistic demand trends and potential supply constraints on new in-cell touchscreens."

We should not take analyst estimates on these things seriously in the first place. Even if they did a better job taking the supply chain into account, the estimates they generate would not be reliable.

Gene Munster, a Piper Jaffray analyst, and his fellow Apple bulls immediately rolled out the excuses for their iPhone 5 miss. As Business Insider reported first, guys like Munster blame uncounted pre-orders for the apparent shortfall.

Apple cannot book a sale on a preorder until a customer signs for it. In a few hours, when my iPhone 5s arrive via FedEx, they can add two more to the total.

Munster was the most bullish, calling 6 million phones sold the opening weekend the "worst case scenario," predicting 8 million out the door, but leaving the window open for as many as 10 million iPhone 5 sales.

I wish I could just write Munster et al. off as irrelevant, but, sadly, they're incredibly relevant. It's because of them that, if you bought AAPL for $700, you woke up to losses (realized or not) Monday morning.

But, on short-term drops like this one and, potentially, over the long run, it's the "irresponsible estimates" and hack analysis from Wall Street types that hurt Apple more than they help. More importantly, they deliver scant value to a firm's clients and the general investing public.

I assume, maybe naively, that when guys like Munster were in college, they were required to take at least a course or two in statistics and research methods.

As somebody who spent several years studying, reading and publishing in the social sciences, I know that business and finance students look down on disciplines that collect and analyze data outside of econometrics. That's too bad because stock analysts go on to bastardize the methods social scientists perfect when they use them incorrectly.

You can't do things like call a few Apple stores, stop in a couple more, talk to people who are in line or on the street and get anything close to an accurate assessment of pending reality. It's even more absurd that these analysts routinely pass off "findings" from their "samples" as something representative of the larger population.

The numbers they come up with and the strategies they use to get there would never make it past the referees who accept and reject submissions for academic journals. In fact, their work would likely never even make to review.

That's incredibly sad because, in terms of importance and impact, most of the stuff academia churns out pales in comparison to the potential aftereffects of the sloppy research work Wall Street analysts perform.

Apple misses Munster's numbers. The stock drops on what is little more than irrational noise. People lose money.

In this instance, Munster did not use the standard analyst tools of rudimentary convenience surveys (which are fine as long as you, the researcher, make clear their limitations), calls to "random" Apple Store employees or store "traffic" checks. What actually happened was worse.

As MacRumors laid out last week, Munster used an even less scientific approach to come to his conclusions. He took what happened last year and assumed (something a credible researcher never does) it would happen again.

Now, Munster will defend himself by saying, "I was right!" If those 2 million or so pre-orders counted, we're at just over 7 million instead of the Apple-reported 5 million-plus and it's all good. That's almost 8 million.

But, let's be clear. That doesn't matter. That's not what the media and investors should be paying attention to. It's the wholly unscientific and unreliable methods Wall Street analysts use to cobble together their notes that should concern us.

This time, it's a relatively innocuous 1% to 2% drop, which supply issues certainly contributed to. Next time, sloppy methodology could be the primary culprit for a much uglier situation.

These analysts do not do what I -- and many others like me across the Web -- do for a living.

Analysts are not reporters. They're not opinion makers. They do not exist to provide unique and provocative perspectives on the day's events.

The media turns some analysts into personalities. Analysts eat it up, by providing the types of "notes" that fuel this identity. The "research" they generate ends up having no investment value, no entertainment value, nothing. It's just unreliably thrown together chatter. It fails to provide the context and advice clients apparently pay for.

What's most ironic is that there's not a bigger cheerleader in the world than Gene Munster and his fellow AAPL permabulls. The last thing Munster wants to do is take Apple down. However, by setting not only lofty expectations, but incredibly unstable ones, that's what he sets up for himself.

At the time of publication, the author held no position in any of the stocks mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Rocco Pendola is a private investor with nearly 20 years experience in various forms of media, ranging from radio to print. His work has appeared in academic journals as well as dozens of online and offline publications. He uses his broad experience to help inform his coverage of the stock market, primarily in the technology, Internet and new media spaces. He has taken a long-term approach to investing, focusing on dividend-paying stocks, since he opened his first account as a teenager. Pendola, 37, is based in Santa Monica, Calif., where he lives with his wife and child.

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