THE CASH-KING PORTFOLIO
Eyes on Kurlak
The role of sales analyst
by Tom Gardner (TomG@fool.com)
Captiva Island, FL (Dec. 2, 1998) -- Yesterday's column on the Gabelli Funds and their 0-for-17 performance versus the S&P 500 index over the past 3- and 5-year periods drew an enormous response from readers. Thank you.
I wanted to share a few of those notes with you before pressing into today's Eyes on the Wise coverage of Wall Street's financial analysts. Tomorrow and Friday, we'll have a full report from a former veteran of the full-service brokerage industry. A truly enlightening two-part column.
But, first, your notes on the Gabelli piece last night.
Remember that when Gabelli Asset Management goes public later this month, it could be valued over $500 million with a very nice reward package for its founder. Given the consistent and entire underperformance of its funds over the last five years, I can only conclude that the value of a brandname in the financial-services industry is, well, just about $500 million.
Here are some responses to last night's article. I should say that I post them not to be self-promotional of this column, but to show that what we have on our hands here is nothing less than the individual investor becoming the primary institution on Wall Street today, as it always should have been. We are together witnessing an increasing power to the people through their full access to information and to an open dialogue on the subject of money.
Fool Ron M. writes:
"Three cheers (no, make that four cheers) for your incredible article on Gabelli. That's an absolutely mind- boggling quote from The Man himself. My mouth is still hanging open, even though I am not at all new to the Fool pointing out such things."
Fool Jeff W. writes:
"Once again, it takes a Fool to point out the most obvious, and that is that the "little guy" can whoop these guys any day following the Fool's sage advice of buying just index funds if it so pleases them."
Fool James S. writes:
"Your Gabelli thing was beautiful, just beautiful."
Fool Jay C. writes:
"Man, I've been waiting a long time for that. For five years I have saved the [Barrons] Round Table predictions. You think Gabelli is bad? Check out some of Jimmy Rogers' macroeconomic calls. When Peter Lynch quit coming they should have slaughtered the turkeys at the Round Table."
In addition to the slew of e-mail on the Gabelli article, I received a great letter on the Eyes on the Wise theme from a long-time Fool in Los Angeles, who goes by the screenname "TheFreep." He wrote to me, in anticipation of tonight's article on financial analysts, with a wonderful press release from Credit Suisse First Boston yesterday on its coverage of Rule Maker stock, Gap Inc. (NYSE: GPS).
His response to the Credit Suisse analyst report serves as our segue into the world of Wall Street research tonight.
Fool The Freep writes:
"I stumbled upon this news release today, though for all I know, you've already seen it -- since it has to do with The Gap. I was stunned by it. While I know nothing about the analyst in question, I can only surmise that she's doing a great job for Credit Suisse, but perhaps not so great for their clients.
"So I clicked open the press release and here are two key notes from her research report on the Gap, as reported by Reuters yesterday:
1. "'The Gap is by far the best company in our universe and arguably one of the best retailers, period.'
2. "'However, the market's expectation that the Gap will be able to open 200+ stores per year for the next 63 years sounds a little scary and the absolute number of locations that is implied by the calculation is staggering.'"
In his reponse to this analysis, The Freep goes on to say:
"As if that's the only way the Gap can expand! Since they've recently opened one new chain, why is it that they can't open others? Or expand into other areas of the world? Or sell more stuff online? Or leverage their brand name? Or... Or... Oh well. :)"
Well, Freep, given your tone and the opening comment in your e-mail, I think you've perfectly anticipated where tonight's column is going on the problems of stock research today on Wall Street. For the newcomer to Fooldom, it's important to explain why The Freep writes, "I can only surmise she's doing a great job for Credit Suisse, but perhaps not so great for their clients."
You may ask, "How can she do well for her firm without doing well for its customers?"
The answer is in the Street's business model. Because retail brokers are compensated based on the number of trades that they make (a curiosity that will be laid bare in tomorrow's C-K article), their researchers are under intense pressure to publish new opinions on the public companies in the industries they follow. Opinions create trades.
The odd downgrade from strong buy to buy (huh?), the absurd upgrade from sell to hold (think about that one), the layering of grays -- accumulate, market outperform, market perform -- let's first recognize that each of these ratings creates a tradable event for brokers at the firm. When the Credit Suisse analyst calls Gap an incredible company but downgrades it from buy to hold based on valuation, you can bet that Credit Suisse First Boston brokers are on the phone lines trying to get clients to move shares around in their accounts.
Whose profit? is the question. And the answer would be plain to all of us if Wall Street firms held their analysts publicly accountable for their recommendations. For example, the Credit Suisse analyst downgrade knocked Gap off $7/8 (split adjusted) as of yesterday morning. But then the stock gained that back and $3 more to $52 1/8 by market close. Who am I to say that Credit Suisse will end up being wrong? Gap may fall 25% from here over the next two years. But, until Wall Street starts taking responsibility for its public recommendations, how can the individual investor ever know whether they're relying on a Michael Jordan with their money or a Michael Hordan (cut by his sixth grade basketball team for violent, unfocused play, never to return to the sport of basketball)?
Fools, until we get a public account of these recommendations, analyst by analyst, how can we be expected NOT to believe that a primary reason for their being research analysts is to generate more transaction events and trading commissions for their firms.
Which brings me to the story of Tom Kurlak, the Merrill Lynch semiconductor analyst that Fools in our Intel Corporation (Nasdaq: INTC) stock folder know all too well.
Mr. Kurlak made a point not once, but twice, of sharing negative thoughts on Intel stock earlier this spring, citing increased competition from Advanced Micro Devices and pressure on the CPU side of the computer business in general. Our own Rob Landley, clearly now something of a pure expert on Intel (certainly in relative, and possibly in absolute, terms) responded to Mr. Kurlak's downgrade of Intel and his price target of $60 per share with the following comment, "Personally, I think the downgrade is bunk." Rob followed that along with an excellent point-by-point response to the Merrill Lynch downgrade (05/19/98: Fools on Kurlak).
This when the stock was at $79 1/2.
When Mr. Kurlak came out on Intel with negative comments and a $60 target price again (once more, right before triple-witching options expiration -- is there a regulator in the house?), your Cash-King Portfolio managers officially muzzled this analyst. We announced that Mr. Kurlak should make no more public comment about Intel until and unless 1) the stock hit his target of $60 per share (sans split); 2) he offered a public apology for being incorrect.
We were pleased, with the stock now at $113 1/2, that Mr. Kurlak confessed, in a recent interview, that (in his words) "I am human" with regard to his projections on Intel. We'll consider that an apology and agree now to listen to his future pronouncements (especially those not falling within a week of options expiration day).
And let me make it clear, we're not being critical because he was wrong. We're being critical of the general lack of accountability on Wall Street.
And so... until we get a clear appraisal from Wall Street about the performance of its research analysts, we are officially announcing tonight that in the Cash-King/Rule-Maker Portfolio, heretofore, we will refer to the Street's research analysts as sales analysts. We encourage you to do the same. They look too much to us like individuals paid to speak often, to change their opinions with the passing of a breeze, and to do so with not a whit of accountability for us to think of them as research analysts. Hence, we encourage you to either call them Sales Analysts (SA) or Conflicted Research Analysts (CRA).
And we've even given them stylish acronyms.
It is, of course, the application of accountability that we care about dearly in Fooldom. The Fool submits that the same sort of scrutiny that was applied to the Beardstown Ladies should be applied to all of Wall Street, broker by broker, fund by fund, in public fashion. The technology certainly allows it. The investment firms certainly have the resources to do it. Without it, how can we tell whether Kurlak's advice over the past ten years -- get in, get out, get back in, no get out, get in now, out now, here we go, back off a little here, etc. -- has been helpful or harmful to Intel investors that listened to him?
After all, over the past ten yeas, Intel has risen from $2 per share to $113 per share. I have to believe that the investor who bought, held, paid no commissions to Merrill Lynch, and who has delayed taxes throughout, is beating Mr. Kurlak handily -- without the hefty research (err, sales) analyst salary. Which has me asking you tonight what the average (not all of them -- there are some great ones) analysts' salary is for -- research or sales?
I have my answer.
To close with an eye on into tomorrow's report, I thought I'd share one final note that I received last night from a contributor to The Motley Fool Radio Show. Each week, this insider in the financial industry contributes the skinny on how Wall Street works for our Foolish radio listeners. Here is his email after last night's report, which gets right to the heart of the sort of accountability covered in tonight's article:
The Spy on The Wise, wrote:
"Great write up on the Gabelli Wise on December 1st. If investors only knew how much money they were really losing by buying poor performing investment products from smiling salesman. Investors need three pieces of information from their advisor to hold them accountable:
- Profit: How much did you make me?
- Cost: How much did it cost me?
- *Net rate of return*: How much do I get?
They need to compare their net return to other investment opportunities to gauge how well they're doing. Ask the brokerage industry why they don't put net rate of return on their statements for their clients?
Keep up the great work and keep turning up the volume.
The Spy on the Wise..."
Indeed. Let's keep our Eyes on the Wise, Fools. See you tomorrow night with the first of a two-part report to remember.
Tom Gardner, Fool
Order your copy of David and Tom Gardner's new book, Rule Breakers, Rule Makers, in advance. This Simon & Schuster beauty doesn't arrive until January, but you can reserve your copy today! The first half of the epic book, on Rule Breakers, elucidates the Fool Port's investment style; the second half, on Rule Makers, further explains Cash-King investing.
Stock Change Bid AXP +1 3/8 100.75 CHV -1 3/8 80.56 CSCO -1 1/2 78.25 KO - 5/16 69.56 GPS -1 7/16 50.69 EK + 5/16 73.19 XON - 3/8 71.25 GM -1 3/8 70.38 INTC -1 7/16 113.56 MSFT -2 3/4 126.75 PFE +2 1/16 113.06 SGP +4 3/8 113.38 TROW --- 38.38
Day Month Year History C-K -0.42% 2.40% 24.39% 24.39% S&P: -0.34% 0.65% 16.43% 16.43% NASDAQ: -0.43% 2.34% 19.74% 19.74% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 126.75 61.94% 5/1/98 55.5 Gap Inc. 34.06 50.69 48.82% 2/3/98 22 Pfizer 82.30 113.06 37.38% 2/13/98 22 Intel 84.67 113.56 34.12% 6/23/98 34 Cisco Syst 58.41 78.25 33.97% 8/21/98 22 Schering-P 95.99 113.38 18.12% 2/6/98 56 T. Rowe Pr 33.67 38.38 13.96% 2/27/98 27 Coca-Cola 69.11 69.56 0.66% 5/26/98 18 AmExpress 104.07 100.75 -3.19% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 73.19 15.90% 3/12/98 20 Exxon 64.34 71.25 10.75% 3/12/98 17 General Mo 72.41 70.38 -2.80% 3/12/98 15 Chevron 83.34 80.56 -3.34% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 3042.00 $1163.55 5/1/98 55.5 Gap Inc. 1890.33 2813.16 $922.83 2/3/98 22 Pfizer 1810.58 2487.38 $676.80 6/23/98 34 Cisco Syst 1985.95 2660.50 $674.55 2/13/98 22 Intel 1862.83 2498.38 $635.55 8/21/98 22 Schering-P 2111.7 2494.25 $382.55 2/6/98 56 T. Rowe Pr 1885.70 2149.00 $263.30 2/27/98 27 Coca-Cola 1865.89 1878.19 $12.30 5/26/98 18 AmExpress 1873.20 1813.50 -$59.70 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1463.75 $200.80 3/12/98 20 Exxon 1286.70 1425.00 $138.30 3/12/98 17 General Mo 1230.89 1196.38 -$34.52 3/12/98 15 Chevron 1250.14 1208.44 -$41.70 CASH $120.62 TOTAL $27250.53 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.
*The year for the S&P and Nasdaq is as of 02/03/98