Remember when leading Wall Street research analysts were feted by corporate chiefs, showered with largesse and could – almost literally – make or break a company’s share price with one brief note? Recent swings in the share price of US online brokerage E-Trade have reawakened those memories and sparked fierce debate on the role of research analysts.
The near-60 per cent plunge in E-Trade shares on Monday and a 41 per cent bounce on Tuesday were largely driven by contradictory notes from two equity analysts who, among other things, disagreed on the question of whether E-Trade was heading for bankruptcy.
Now, E-Trade’s plight has prompted the Wall Street Journal’s Deal Journal to declare the resurgence of research analysts, “four years after Eliot Spitzer put a major dent in their power and prestige”.
In one case after another, analysts have been spurring massive swings in companies’ market values, like when CIBC analyst Meredith Whitney recently said Citigroup might face a capital shortfall. That report helped lop billions of dollars off the market cap of the US’s biggest bank — and probably helped precipitate the demise of the bank’s then CEO, Chuck Prince.
Whitney, it should be noted, was at it again this week, as reported on Tuesday by FT Alphaville, with a further grim note – this time advising investors to avoid large-cap bank stocks, as what she terms the “ring of fire” or their “virtuous interconnectedness” plays out in lower earnings, capital ratios, ratings, “and consequently, still lower earnings” .
In E-Trade’s case, Citigroup analyst Prashant Bhatia suggested Monday that its mortgage-related losses could trigger a run on its bank operations and force a fire-sale of assets and possible bankruptcy.
A serious charge indeed. On Tuesday, Mike Vinciquerra, analyst at BMO Capital Markets, said in a
research note that a bankruptcy remains “highly unlikely”.
“Withdrawals would have to be massive for the company to have major issues,” he said. “A key fact that some people seem to be ignoring is that E-Trade’s deposits have actually grown for the past 13 months consecutively.”
E-Trade’s client assets were at $227bn in October, up 4 per cent from September, reports the FT.
E-Trade sharply citicised the Bhatia’s report, saying it was based on faulty data and amounted to irresponsible “fear-mongering”.
More significant, BMO’s Vinciquerra wrote in his Tuesday note – with what Deal Journal describes as “barely disguised frustration” – that Bhatia’s report itself could have sparked a run on the bank.
“Monday’s trading activity was devastating for E-Trade shareholders to say the least, as it was for our own rating on the shares”, wrote Vinciquerra, who “still thinks an E-Trade bankruptcy filing is ‘highly unlikely’, reports Deal Journal.)
Of the 12 analysts that cover the company, eight have “hold” ratings on the stock, one now has a “sell” (Bhatia) and three have some form of a buy rating, according to Thomson Financial, says Deal Journal.
“The Bhatia-inspired sell-off Monday… couldn’t have made his competitors too happy. It will hurt the track record of their recommendations just as they come under the microscope for their year-end salary and performance reviews.
The FT adds that another analyst, Matthew Fischer, at Deutsche Bank, also said in a note on Tuesday that E-Trade’s retail brokerage business remains healthy.
Despite the stupendous rebound in E-Trade’s shares following Vinciquerra’s report – up $1.45 to $5 — the stock still is more than $3 below where it was before the company triggered its problems last Friday by forecasting larger-than-expected mortgage-related losses and announcing an SEC probe.
In a phone interview, Vinciquerra stayed “above the fray”, noting that Bhatia has long been more cautious than he on the stock, says Deal Journal. “Hats off to him; he has certainly been more right on the stock call than we have. It’s part of a healthy market for him and me to disagree.”Bhatia, meanwhile, “was travelling and unavailable for comment”, adds Deal Journal.
But something tells us it won’t be long before Bhatia is back with another note.