September 15, 2008

Should anyone follow analysts recommendations?

Ever wondered how conflicts of interest may affect the recommendations of analysts in the financial services industry? Check out the demise of Lehman Brothers and let’s look at the recent ratings posted on Yahoo Finance:

Not a single analyst of the ones surveyed by Thomson/First Call posted a “Sell” recommendation for Lehman Brothers. In fact, earlier this month, there were still 3 “strong buy” and 4 “buy” recommendations posted. As late as September 11, 2008, Citigroup merely posted a downgrade from a “Buy” to a “Hold” recommendation.

Granted, taking losses hurts, especially when you were holding a stock that was typically trading above $50 until early 2008. But what was the rationale of holding a stock that’s essentially done, “toast” as one trader put it? Just because the losses would be too painful to realize?

When Citigroup’s ”Hold” recommendation came out, a disillusioned investor would have been in severe pain, but could have still received as price of about $4 for his/her shares. Yet, how does that compare to the 20 cents we’ve seen today. When a company is essentially dead, why should an investor hold on to the stock? What does it take to get an analyst to change his/her mind - how far must a stock price fall before a “buy” becomes a “sell”?

A probing investor cannot help thinking that there may be some foul play involved here.

Curious to hear some comments on this.

Happy Trading!

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