Something about the stock reports produced by Standard & Poor's, a division of McGraw-Hill (NYSE:MHP), has been troubling me. At first, I thought it was just me, but about a week ago, I was reading back issues of The Wall Street Journal and, lo and behold, that venerable newspaper was stumped as well!
The source of the confusion is S&P's habit of giving two sets of opinions when evaluating a stock, but providing little explanation of how the opinions interrelate. As a result, for any given company, a single S&P stock report can simultaneously tell an investor that the stock has lousy prospects, is highly overvalued... and is definitely a "buy." (Or conversely, that investors should "hold" or "sell" an undervalued prospect with a brilliant future.)
According to the Journal's story, the divergent views arise because human analysts review a company's numbers and decide whether the stock is a "buy," "sell," or "hold." But at the same time, S&P's computers are whirring in the background, chewing over the same numbers, and spitting out "quantitative evaluations" of the company's fair value and business outlook. S&P prints both human and non-human conclusions in the stock reports, but gives little clarification of how the two conclusions are produced, and little explanation of contradictory conclusions when they crop up.
Just for fun, I checked the S&P reports on the first 10 tech and industrial leaders that came to mind, to see how S&P's human analysts and computer counterparts viewed them. Lo and behold, the results for six of the 10 were divergent:
Nokia (NYSE:NOK) and Citigroup (NYSE:C) were both beloved by humans, but the computers dissed them. On the other hand, human analysts counseled shunning, or at best holding, Hewlett-Packard (NYSE:HPQ), Agilent (NYSE:A), Kodak (NYSE:EK), and Motley Fool Stock Advisor pick Dell (NASDAQ:DELL), while the computers begged to differ. With Agilent in particular, the divergence of viewpoints was striking. S&P's computers believe Agilent is more than 40% overvalued; they gave it the worst "outlook" rating possible under S&P's system, a "1-". Yet, S&P's human analysts nonetheless advise investors to continue holding the stock.
Now, don't get me wrong. At The Motley Fool, we think that differing points of view on companies and their prospects is a good thing. Stocks picked in Motley Fool Hidden Gems are not just recommended and forgotten -- they have to survive intense questioning by a disinterested analyst and constant review, over subsequent months and years.
It would be nice if S&P could explain its methodology a little more clearly. Fortunately, S&P says it will do just that in future versions of its research.
Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article. The Motley Fool has a disclosure policy .
