| [Role of stock analysts]
Following the accounting scandals at Enron and
other companies, the research departments of Wall
Street's biggest firms came under intense scrutiny
for the fialure of their analysts to discern the
accounting frauds. Analysts who followed the high-tech
sector have also been criticized for failing to
predict the technology-stock collapse.
Many have asserted that the failure of "analysis"
was due to conflicts between investment firms'
analysts and investment bankers. That is, the
analysts gave overly rosy predictions of company
prospects to bolster the firm's interest in corporate
finance work with the companies.
For example, analysts at Salomon Smith Barney
kept "buy" recommendations on Enron
stock even as the company fell into bankruptcy.
See "Wall Street Analysts, Vilified, To Get
Stricter Regulations" WSJ 02/07/02.
STUFF HERE ABOUT THE CREDENTIALS OF A STOCK
VALUATOR |
Beware
the Source of Your Stock Tips
While there is no one out there who can consistently
give you great stock picks, many so called "stock
tipsters" make much money based on "hot
tips." However, these tipsters have a similar
reputation as used car salesmen. Completely bogus
tipsters were common during the bull market of
the 90s.
In the 03/13/00 Time article, "Taking
Stock Scams Off-Line", a scheme hatched by
a group of Georgetown law students is detailed.
One student attracted a few thousand subscribers
to his bogus site, Fast-Trades.com. Here, the
student issued stock picks and identified four
penny stocks as hot. Previously, he and some classmates
had purchased thousands of shares of these four
stocks. Next, the students used web aliases to
post hyped and misleading messages that recommended
the stocks. Many investors loaded up on these
stocks, and one of the them, American Education
Corporation, rose 700%. Before reality set in,
the students had sold their shares, executing
a classic "Pump and Dump." The group,
which included one of the students' mothers and
member of the Colorado Springs city council, was
caught by the SEC, but thier story is played out
quite often. The best thing to remember is that
if a tip sounds just too good to be true, it more
than likely is.
Irrational
Exuberance
The late 90s astronomical valuations of
some high-tech companies suggested that
stock analysts can stray (badly) from DCF.
In April 1999, AOL was selling at 700 times
its earnings, assumed a "sky is the
limit" growth potential. It defied
all conventional valuation logic.
At the time Fed Chairman Alan Greenspan
admonished investors against "irrational
exuberance." Greenspan looked wise
when, during 2000, the bubbles of many stocks
burst. For example, Globe.com went public
in 1998 and had the largest one day price
leap in history. In 2001, the stock was
pulled from the NASDAQ market listings because
its price was too low. See
- "Web Tide: Initial Public Offerings
Aren't the Same in Era Of Internet-Stock
Mania" WSJ 01/19/99
- "Poster Boys: After the Soaring
IPO And the Fleeting Fame, A Question:
What Now?" WSJ 05/02/01.
|
|
4.3.2 Basic Stock Valuation