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Tue November 15, 2011
Why analysts didn't recommend selling McCormick & Schmick's stock
On this week's Money Matters, financial commentator Greg Heberlein says the sale demonstrates why you should be skeptical about the recommendations of securities analysts.
The seafood chain has accepted an $8.75 a share buyout offer. In one day, shareholders saw their stakes soar 35 percent. Not bad, eh? Especially since the company has been losing money for the past four years?
Well, for most investors it was horrendous! The stock initially sold seven years ago at $12. That means the first buyers will lose more than a fourth of their investment. Those who bought at the top (near $30) will lose about 70% of what they paid.
Would investors have avoided losses if they had followed the recommendations of securities analysts? No!
Over its seven years, McCormick & Schmick’s attracted 25 ratings from the outsiders who know this company best. Sixteen said this stock was a good deal. Eight said you should simply hold the stock.
Only one said sell, but it wasn’t at $30, or $20, or even $10. It was hours after the buyout was announced, a few cents below the $8.75 offer. The brokerage believed investors should sell to move the money to more attractive investments and not face the faint risk the deal would fall through.
The role of Wall Street advisors might have been a tad unusual, considering the unanimity of positive opinion, but it was hardly unique. A recent study showed that nearly half (45%) of all stock recommendations are outright "buys". Almost all recommendations, from "hold" on up, avoid negative alternatives. Only 3 percent say "sell".
Among the reasons for that lopsided percentage are analysts don’t like admitting mistakes, they don’t want to risk offending the companies they follow, and they don’t want to draw attention to their bad analysis lest they offend major investors who listened to them in the first place. Most analysts simply drop coverage of a stock to avoid saying "sell".
What can you learn from this?
First, it is not uncommon for sharks to buy companies when the stock falls below its usual levels. The Wall Street term is buy low, sell high.
And investors certainly shouldn’t consider analysts’ recommendations with biblical faith. The advice might help you buy a stock heading higher, but it won’t protect you when the stock heads down.