TV Says Sell Intel
Analysts very tight with Uncle Sam?

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (April 14, 1999) -- This morning an analyst at BancBoston Robertson Stephens did investors a great disservice by appearing on television and telling everyone that he would sell Intel (Nasdaq: INTC) today. He said he would sell Intel despite the fact that he has a long-term attractive rating on the stock.

"We rate it long-term attractive. Sell it now."

If that isn't a case of a confused young man, what is? We fail to see how the act of selling today can help us benefit from the long-term attractiveness of the stock.

The analyst expects Intel's summer to be slow and that's why he advises selling. That expectation is hardly a revelation, though; instead, it's a trend that we can come to expect from Intel. The first few quarters of the year are often slower at Intel and the next two are stronger, with the fourth quarter typically strongest. This is the case with many companies -- if not most -- that sell into the retail channel.

Although the analyst we're questioning often provides smart analysis on Dell (NYSE: DELL), IBM (NYSE: IBM), Compaq (NYSE: CPQ), and others, his final conclusion with Intel left a great deal to be desired. And unfortunately for the analyst, only the conclusion matters. If your conclusion is flawed, your analysis -- no matter how great -- goes for naught. (Another dilemma is that the analyst advised people what to do with the stock at all, instead of providing facts and suggesting that investors make up their own minds -- but that's another story.)

We'll hold the analyst and his firm accountable on Intel and see where it gets us. We'll see when they say, "OK, buy Intel again, people."

So let's set the Foolish Accountability Stage (FAS tm):

We'll assume, like the typical investor, that we don't read about the analyst's on-air comments on Intel until tonight on a message board or in tomorrow's newspaper. Therefore, we'll assume that we didn't sell Intel today. We'll next assume that -- being an obedient public drone -- we'll sell our stock (as the man said to do) tomorrow morning when the market opens. So when Intel opens for trading tomorrow (it closed at $57 today), we'll pretend to sell our shares and we'll note the price we'd receive for them. Then in the months ahead, we'll see when the full-paid, full-service broker/analyst tells to buy Intel again.

Some of our Intel shares have been held for longer than one year, so we'll pay about a 20% tax on those shares. Some of our shares have been held for less than one year, so we'll pay a 28% tax on them. (The analyst apparently forgot to mention the tax bite that all investors will suffer upon selling Intel, so we'll assume that he doesn't care if we must pay short-term or long-term gains. Therefore, we'll pretend to sell all of our shares.) We'll pay, on average, then, about 24% in taxes. Assuming that we get a (pretend) sales price tomorrow near today's price ($57), after taxes are paid, we need to buy Intel back at a price of about $43 per share JUST TO BE BACK TO EVEN.

[For more brilliance, see tomorrow's column, where I correct errors I made in this one.]
We sell at $57. If we can buy the stock back at $43, we'll be EVEN! Great. I'm so glad we're selling (hypothetically). At $43, Intel would trade at 18 times 1999 earning estimates. Sure, the stock could go that low -- perhaps. And even though there's a good chance that it won't, we don't want to sit through a slow summer. We'd rather sell Intel and sweat out the summer uninvested. We'll hope that Intel will fall sharply (at least 24%) so that we can buy it back and be EVEN on our position. Lovely. (Even if the stock falls 30% and we scrape a few extra percentage points out of the deal, it's a dumb risk-to-reward proposition from the start.)

This is just one more problem with the Wise and the banal advice that they deliver with all the seriousness of the Pope. (God bless him.) The Wise rarely -- if ever -- take into account that investors pay taxes.

It's unfathomable that analysts ignore taxes when they determine an investment's potential for return, because the potential for a strong return is almost nil if you're buying and selling frequently and regularly paying taxes! Taxes are a much more serious friction cost than trading commissions. Not only are taxes expensive, they greatly reduce the amount of money that you ultimately have growing in the stock market. If a brokerage house or mutual fund wants to beat 90% of its peers, all it needs to do is begin to account for tax consequences in its numbers before making sell recommendations (and hold others accountable to taxes, too). Doing so, the analysts will run numbers and find that selling a good company at a profit is almost ALWAYS a bad idea, so it won't -- and so its performance will improve. Selling a good company, when you consider taxes, almost never makes financial sense.

The flat "sell" statement from the analyst at BancBoston Robertson Stephens today (Intel's stock was up before the interview, incidentally) could prove to be a perfect example of our point. If Intel doesn't decline by at least 20% to 28%, or more, the analyst's recommendation will prove very poor advice to anyone who had a gain in Intel shares and sold.

Unless analysts are very tight with Uncle Sam, they need to have their "analysis" examined and base their suggestions on reality. Investors pay taxes. The way that analysts advise the public and the way that mutual funds trade, you'd believe that the Wise don't pay anything to Uncle Sam. (Oh, by the way, taxes are due tomorrow! If you need help, visit the Fool's Tax Area.)

There wasn't substantial news to report on Intel today that wasn't in our column yesterday; finally, we'll cover Johnson & Johnson's (NYSE: JNJ) first quarter as soon as results are announced. To discuss direct investing or any company, please visit the Drip Companies message board.

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