'Sell' Ratings Remain a Rarity

NEW YORK -- Anybody who followed the advice of Wall Street's top-ranked analysts, none of whom would say "sell" for a single company in the securities industry this year, is reckoning with subprime-like losses.

Merrill Lynch's Guy Moszkowski, UBS's Glenn Schorr and Sanford C. Bernstein & Co.'s Brad Hintz maintained either "buy" or "hold" recommendations on Bear Stearns as it fell 39 percent in 2007, the most since the firm went public in 1985. Moszkowski and Hintz had buy ratings on Morgan Stanley while the stock shed 22 percent in New York trading. Moszkowski and Schorr advised holding on to Citigroup as it dropped 40 percent.

Shrinking fees from brokerage commissions mean fewer dollars for research and more pressure on analysts to hang on to paying customers such as hedge funds. While clients care little for ratings, they covet meetings with company executives -- audiences that favored analysts can deliver. As a result, "sell" ratings on Wall Street are even scarcer than four years ago, when 10 securities firms paid $1.4 billion to settle allegations by then-New York Attorney General Eliot Spitzer that they used research to improperly promote stocks.

"An analyst cannot issue a sell rating because he doesn't want to lose access," said Tom Larsen, a former Credit Suisse Group analyst who now runs research and helps oversee $6 billion in investments at Somerville, N.J.-based Harding Loevner Management. "It's logistically cumbersome for the buy-side to arrange its own meetings with company management, so this concierge service is very useful."

Analysts rarely said "sell" before the Spitzer settlement because they didn't want to jeopardize investment banking fees. Now, they're more concerned about maintaining good relations with company management. Only 7 percent of analysts' recommendations have been to sell this year, down from 11 percent in 2003, data compiled by Bloomberg show.

Hintz, 57, the third-ranked brokerage-industry analyst according to Institutional Investor magazine, said in an e-mail that his ratings are not intended as trading advice and are not influenced by any desire to mingle with company managers. Ratings from New York-based Sanford Bernstein indicate how an analyst expects a stock to perform relative to a market index in the year ahead, according to disclosures in the firm's research reports.

"We are not supposed to make trading calls," Hintz said. "Just because a brokerage stock goes down over a short period doesn't mean it's an underperform."

Moszkowski, 50, and Schorr, 40, declined to comment. Moszkowski is the top-rated analyst in the Institutional Investor survey, followed by Schorr. UBS spokesman Douglas Morris said the rationale for the ratings are included in the research notes, which "speak for themselves."

Instead of saying "sell," analysts have stuck with "hold" ratings that are less likely to antagonize the senior executives they monitor, Larsen said. The ratio of hold recommendations has climbed to 48 percent this year from 40 percent in 2003, Bloomberg data show.

While a "hold" might be enough to signal to institutional investors that a company is in decline, retail investors follow analyst recommendations literally, according to a study published in the Journal of Financial Economics in August.

Authors Ulrike Malmendier, an economics professor at the University of California at Berkeley, and Devin Shanthikumar, an accounting professor at Harvard Business School in Boston, analyzed trading data from U.S. exchanges between 1994 and 2001. They concluded that institutional investors sell stocks downgraded to hold, while small investors react to buys and sells, but not holds.

"Companies can live with a hold recommendation," said Larsen of Harding Loevner. "The tacit understanding by everyone, except possibly the retail investor, is that it's a less harsh way to say sell."

For analysts, the punishment for a negative rating can be as swift and unmistakable as a door slamming shut, said Richard X. Bove, a Lutz, Fla.-based analyst at Punk, Ziegel, who downgraded the top five U.S. brokers to "sell" in July.

"At one of the companies I've been writing very negative things about for a while, the CEO absolutely refuses to talk to me anymore and I don't have access to that management," Bove said in an interview, declining to identify the executive. "And if you lose access to management, you lose the ability to take them on the road and that reduces your commission income."