Sell Ratings Still Rare

A decade ago, when dot.com stocks were setting Wall Street afire, stock analysts were fanning the flames with “buy” ratings on any stock that had some connection with the Internet. When the bubble burst, on the other hand, there were few “sell” ratings to be found. Critics pointed out that many analysts worked for companies doing business with the firms whose stocks were being rated and, as a result, government regulators asked for full disclosure of such relationships.

Fast forward to the current economic cave-in. When stocks started their major downward move in early October of last year, analysts were slapping a “buy” rating on almost 40% of the stocks they reviewed. Even as the crisis has deepened, “buy” ratings continue to appear on about a third of the stocks analysts look at. What didn’t change over that period was the number of stocks that earned “sell” ratings. Just over 5% of all stocks analyzed have garnered the “sell” label. Some of the analysts’ recommendations along way were glaringly wrong, like an upgrade on Bank of America that was followed by a heart-stopping 77% plunge in the stock price. Another analyst touted Alcoa as a strong buy, only to see the shares drop by 70%

Critics of the system are questioning the value of stock analysis if it couldn’t provide an early warning that the markets were headed for trouble. Some analysts, however, defend their ratings by pointing out that they were blindsided by the severity of the downturn, just as many others in the financial world were. As for current “buy” recommendations, analysts point out that, with the markets down almost 50% from their highs, stocks are cheap compared to historical norms, and therefore the “buy” advice is justified.