Analysts Not Much Help Following Gulf Spill

Todd Shriber
 
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If you have been following equity markets for an extended period of time, by now you know that sell-side analysts are a curious bunch. Perhaps you remember the go-go days of the technology sector bubble in the late 1990s that saw many analysts tout shares of companies that were not profitable. Touting companies that do not make any money is one thing. Continuing to recommend those stocks when their price tags flew into the triple-digits and their P/E ratios soared to 40, 50 and higher is another issue altogether.

Worst of all, many of these analysts continued to recommend some of those tech names on the way down and history shows us the way down was quite bloody as many of tech's triple-digit club in the late 1990s disappeared and plenty of others fell to below $10 or lower only to never recover their pre-crash levels.

The SEC supposedly did something about this, forcing investment banks to separate their banking business from their research operations. A novel idea, but more than a decade later, the effort has proven futile. ''Sell'' is still viewed as a four-letter word in analyst parlance and that is a problem for investors. Consider that now-acclaimed banking analyst Meredith Whitney was viewed as somewhat of a pariah for slapping ''sell'' ratings on many of the largest and most prestigious U.S. banks BEFORE the financial crisis. Obviously, she was right and her courage was justified.

Analysts that follow the energy sector could use some of that courage in the wake of the oil spill in the Gulf of Mexico. Looking at the four companies that have garnered the bulk of the negative press related to the spill, analysts have been apprehensive about slapping ''sell'' ratings on these firms.

BP (BP) is down more than 25% since the April 20 explosion at the Deepwater Horizon rig and the company has seen more than $30 billion in market value evaporate. According to Thomson Reuters data, 34 analysts track BP. Fifteen still rate the shares ''buy'' and 12 rate the stock ''outperform.'' Seven rate the shares ''hold.'' Only two downgrades have taken place since April 20.

According to Yahoo! Finance, 33 analysts follow Transocean (RIG), the company that leased the rig to BP. Only three of those analysts have downgraded the stock since April 20 despite the fact that the shares are down 30%. The three downgrades were to ''neutral,'' ''hold'' and ''market perform.'' Not one ''sell'' in the bunch.

Cameron International (CAM) plunged to a seven-month low on April 29 and the stock is down 20% since April 20. According to Bloomberg News, 18 analysts rate Cameron a ''buy'' and nine rate the stock a ''hold.'' These analysts expect 41% price appreciation in the next 12 months from Cameron, according to Bloomberg, and Yahoo! Finance shows no downgrades since April 20.

Halliburton (HAL) shares are down about 15% since April 20. That performance was good for only one downgrade, from FBR Capital, but that downgrade, which took until April 30 for FBR to announce, was wiped out by a May 13 upgrade of Halliburton, also by FBR.

There may come a time when all four of these stocks are winning investments again and that time may arrive sooner for some than for others, but the bottom line is that trying to buy these names over the past month because they look cheap has been akin to catching falling knives. Unfortunately, investors certainly could not rely on the analyst community for protection.

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