Elusive Analysts
Monday, June 15, 1998
by Jeff Fischer
(JeffF@fool.com)

ALEXANDRIA, VA (June 15, 1998) -- Consider a comet that makes its pass every 76 years -- it's something to see for a few months, but it doesn't markedly change your life. Likewise, Asia will continue to darken our skies, but it probably won't change the quality of life five years hence. That said, today investors were doomed from the beginning. U.S. stocks followed international markets sharply lower after Asia watched its equities continue to melt beyond recognition.

Detractors believe that the Fool Port will be vaporized in a bad market, but it handily bettered the ugly performance of its foes yet again. I don't say "yet again" in order to boast, but to remind that repeat outperformance is the only way to crush the averages over time. Today, the S&P lost 2% while the Dow fell 2.3% (its second-largest point drop -- 207 -- this year), and the Nasdaq shed 1.7%. The Fool Port's dinghy hardly felt the storm, dipping only 0.5% largely thanks to continued buoyancy in Amazon.com (Nasdaq: AMZN).

The online retailer's stock closed at $65 3/4, a new high, on five times normal volume. In one week the stock has gained over $21, or nearly 50%. According to the National Association of Securities Dealers, the short sale interest on Amazon was 4.3 million shares in May, up from 3.3 million in April. Adjusted for the split, it was actually 8.6 million shares, or over one-half of the entire float of 17 million shares. So it's very likely that a short squeeze continues to push the stock higher, as David wrote last Thursday -- but fueling the squeeze was improved sentiment regarding Internet stocks and the prospect of outside investments from established companies like GE and Disney -- as exemplified by GE's recent stake in CNET (Nasdaq: CNWK).

Amazon has a market cap of over $3.2 billion, meaning the stock trades at a potential 6.5 to 8.5 times 1998 sales. Having written about our investment in Amazon on Friday, we'll again paddle this river of thought later rather than now.

3Dfx (Nasdaq: TDFX) sank with the market despite news that its Voodoo2 product is being used by AITech to make 3D gaming kickin' on televisions, too. One contributing factor in the stock's quick plummet from $35 to $18 the past two months was very likely short sellers. In May, short interest in 3Dfx increased 394% to 1.2 million shares from only 249,000 shares in April. With a ten million share float, this isn't nearly as substantial a percentage sold short as with Amazon (10% vs. over 50%), but it's a large increase nonetheless.

Iomega (NYSE: IOM) announced that its Zip drive will be available as an option in two new IBM personal computer lines, while the company also introduced its new line of Zip drives for Notebook computers. Flipping through the fliers in the Sunday newspaper it's obvious that many more computers now come with Zip included than they did even three months ago. I like Iomega's logo for "Zip Built-In," too. The company is branding itself like Intel. Iomega also announced a Clik! license agreement, but the stock was down 4%. Today's Post of the Day tackles the issue of a new storage standard.

This one is interesting:

America Online (NYSE: AOL) announced that it's teaming with the Alliance for Better Campaigns to engage Americans in a national online discussion about how to improve political campaigns. (Remember Bill vs. Bob vs. Ross?) This news serves to remind us that over the years AOL and the Internet will improve life well beyond mere e-mail and information sharing. The Internet connects a country (and the world), and what everyone chooses to accomplish with this technology has yet to be imagined.

But it ain't perfect! And neither are we...

For about seven hours this weekend there was an editing mistake in Friday's Fool Port column. It's worth mentioning for a few reasons. First, in relation to a Morgan Stanley Dean Witter rating on KLA-Tencor (Nasdaq: KLAC), the correct sentences were:

"From here forward... perhaps [KLAC] can outperform. This analyst thinks so. But he also thought that it was a strong buy over the past months, too."

That's the correct version. For several hours the last sentence had incorrectly read, "But I also thought it was a strong buy over the past months, too." This is important to clarify not because I don't want to be wrong (our mistakes are public twenty-four hours a day), but because I'd never write that I thought anything was a strong buy, a short-term buy, a hold or a sell -- none of that analyst garbage. I'd never write that in any public column. (Can you believe that these guys actually put out press releases to share their opinions and thereby move the market, as if they have the right?) Instead, the paragraph was simply stating that this analyst now thinks KLAC will outperform the market, but in the past he had it rated as "Strong Buy." Obviously "Strong Buy" turned out to be Big Mistake, so his "Outperform" rating shouldn't be given any more merit than his original rating.

More important to address, though, are the numerous wrongs that analysts effectively commit against investors as they merely spew out ratings without any background information or past performance numbers. If analysts think enough of their ability to analyze stocks that they publish their opinions of companies, they should support any statement with background information and performance facts -- yes, give proof of intelligence alongside the given stock rating. Whenever an analyst rates a stock publicly we should all want to see:

  1. ALL of the previous ratings they had on the stock.
  2. ALL of the corresponding dates with those ratings.
  3. The stock's performance during those times.
  4. This performance compared to a passive index fund.
  5. A listing of all of the other stocks that he or she covers, and the ratings and performance on those.
This might seem to be an abundance to ask, but most analysts only cover a handful of companies. They have past performance available and they should share it publicly (for free) whenever they have the urge to share a rating that has the ability to impact the stock market. Merely spitting ratings at the public is worthless and should be considered as worthless without more information. We need background, previous ratings, past performance, and the like.

Until then, all these analyst "Calls from the Mountaintop" should be ignored. It's a shame that they have so much influence. Firms issue press releases for press, of course, with the hope of drumming up more business; but these press releases move the market and that's wrong. The "shot in the dark" stock ratings and the analysts behind them need to be more accountable. If investors saw the horrible track records of some of the analysts making the calls, these "investors" probably wouldn't react to the analyst's press release, keeping the stock price true and saving everyone trouble.

Firms and analysts that begin to be fully and publicly accountable now will be ahead of the curve. Eventually, let's hope that everyone will be accountable thanks to this medium, and sub-par analysts will rightly draw less and less attention. Fool on...

[Related message boards: Amazon.com I America Online I KLA-Tencor I Iomega I Innovex I 3Dfx]

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN +4 13/16 65.75 AOL -1 7/8 85.13 T -2 9/16 60.38 DD -3 1/16 71.69 DJT - 5/16 8.06 XON - 13/16 68.50 INVX - 3/4 13.75 IP -1 43.94 IOM - 1/4 6.25 KLAC + 3/4 25.56 LU -2 3/8 71.00 COMS + 1/8 24.13 TDFX - 13/16 21.50 SPY -2 49/64 107.64
Day Month Year History FOOL -0.52% 5.10% 21.08% 306.36% S&P: -1.99% -1.27% 10.98% 134.95% NASDAQ: -1.67% -3.55% 9.26% 138.24% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 85.13 2240.89% 5/17/95 1960 Iomega Cor 1.28 6.25 388.13% 9/9/97 580 Amazon.com 19.11 65.75 244.05% 10/1/96 84 LucentTech 23.81 71.00 198.22% 8/12/96 130 AT&T 39.58 60.38 52.55% 2/20/98 215 DuPont 59.83 71.69 19.81% 1/8/98 115 S&P Depos. 95.91 107.64 12.23% 2/20/98 200 Exxon 64.09 68.50 6.88% 4/30/97 -1170*Trump* 8.47 8.06 4.80% 2/20/98 270 Int'l Pape 47.69 43.94 -7.87% 1/8/98 425 3Dfx 25.67 21.50 -16.24% 8/24/95 130 KLA-Tencor 44.71 25.56 -42.83% 8/13/96 250 3Com Corp. 46.86 24.13 -48.52% 6/26/97 325 Innovex 27.71 13.75 -50.38% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 60438.75 $57856.88 9/9/97 580 Amazon.com 11084.24 38135.00 $27050.76 5/17/95 1960 Iomega Cor 2509.60 12250.00 $9740.40 10/1/96 84 LucentTech 1999.88 5964.00 $3964.12 8/12/96 130 AT&T 5145.11 7848.75 $2703.64 2/20/98 215 DuPont 12864.25 15412.81 $2548.56 1/8/98 115 S&P Depos. 11029.25 12378.67 $1349.42 2/20/98 200 Exxon 12818.00 13700.00 $882.00 4/30/97 -1170*Trump* -9908.50 -9433.13 $475.38 2/20/98 270 Int'l Pape 12876.75 11863.13 -$1013.63 1/8/98 425 3Dfx 10908.63 9137.50 -$1771.13 8/24/95 130 KLA-Tencor 5812.49 3323.13 -$2489.37 6/26/97 325 Innovex 9005.62 4468.75 -$4536.87 8/13/96 250 3Com Corp. 11715.99 6031.25 -$5684.74 CASH $11662.57 TOTAL $203181.18

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