Wednesday, August 31, 2011

A Reminder of Why Sell-Side Analysts Add So Little Value

On Monday I caught the second half of Tom Keene's noontime Bloomberg program. Within the space of just 20 minutes, I had two reminders of why sell side analysis provides so little value to investors.

First, I caught Citigroup's Deane Dray's monologue on why he prefers GE instead of UT.My 2008 post on the two conglomerates couldn't be more different. Dray essentially cast doubt on UT's decades of consistent performance, while essentially arguing for a timing play on GE.

The price chart on the left illustrates the point of my 2008 piece, even three years later. Dray, however, thinks UT's decade of impressive share price growth, which has outstripped both the S&P500 Index and Immelt's hapless GE, is just a souffle waiting to deflate. He apparently believes GE will experience a magical mean-reversion, despite the lack of adult leadership at the top.

Along with that, Dray talked about 3M, mixing in discussions of economic expansion phases and relative merits of the various firms. That took me aback, since I've seen work suggesting that the concept of simplistic, always-sequential and reliable economic phase occurrence is largely a myth. Not to mention, as I listened to Dray, that one would need to be correctly forecasting the phases flawlessly for his approach to work- if it does.

Honestly, that sort of 'analysis' seems to me to descend to the levels of voodoo.

Next up was Paul Miller of FBR. Miller spent his time questioning BofA's purchase of Countrywide. Well, I was already there the day after the acquisition. Does that make me a standout bank equity analyst or seer? No, I think it just makes me a sensible business person with some banking experience who saw one ailing firm buying a near-dead one and drew the obvious conclusion that the deal wasn't going to rehabilitate the former.

Moreover, Miller missed the essence of what BofA really is. At its core is, of course, the old BofA retail California franchise. But to that has been glued North Carolina National Bank's, a/k/a Hugh McColl's Nationsbank's dispersed bank acquisitions in the Southeastern US, plus, later, by McColl's lieutenant, Ken Lewis, the dying Countrywide and staggering Merrill Lynch. Which is to say, an unfocused mess of a financial utility which paid too much for its last two mistakes, which were pursued in the same spirit of the banking acquisitions which bulked up the original NCNB. In fact, BofA itself was stumbling when Nationsbank captured it in 1998.

The second chart compares the S&P500 with BofA's share price from 1985. It's not a pretty picture. Lewis' tenure from 2001-2009, was marked by the bank essentially treading water relative to the index. The latter fell after the technology bubble burst in 2000, against which BofA appeared to rise. But a decade later, the bank is back where it was 26 years earlier, while the index only fell slightly.

You needn't have been a genius, or, I guess, Paul Miller to have had doubts about BofA for at least the past three years. Probably a lot more than that.

Why Tom Keene happened to have these two analysts as guests on Monday, I don't know. But it troubles me a bit that he seemed so enamored with both of them, when their comments were so unremarkable, when not specious.

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