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Analysts Who Get It


Sometimes, telling people what they don't want to hear can get downright nasty. Daniel T. Niles, Lehman Brothers Inc.'s (LEH ) semiconductor and hardware analyst, says he received anonymous threats--presumably from angry investors--after downgrading cult tech stocks in the late 1990s. "It didn't matter that I was right," he says. Likewise, Bernstein's phone lines were jammed after Sagawa panned Cisco in 2000. "Investors were saying that I crashed their favorite stocks, and that I was incompetent, only not using language that nice," he says. "I took a lot of abuse."

In hindsight, the most radical calls look like common sense--backed by hours of homework. Sagawa downgraded Nortel Networks Ltd. and Cisco in September, 2000, after analyzing trends for big telecom service providers, their main customers. He ran some 40 different ratios on a handful of companies and found that telecom capital spending had reached 36% of sales, while cash flows from operations were less than 20% of sales. Add a heap of debt, and clearly service providers couldn't keep buying. "It was entirely predictable, to be honest," Sagawa says. Improving cash flow and a slow recovery in capital spending prompted him to turn bullish in April on Nortel (NT ), Nokia (NOK ), and Lucent Technologies (LU ), before the Street and the stocks' rally in October.

But common sense rarely rules markets--as money managers ruefully admit. When Gimme Credit, a fixed-income research shop, issued a warning on Qwest Communications International (Q ) last November, Greg Hosbein, a principal at Segall Bryant & Hamill Investment Counsel, a Chicago money manager, sat tight. "The bonds were in high demand," says Hosbein, who held $10 million in Qwest bonds at the time. After a second warning in April from Carol Levenson, Gimme Credit's director of corporate bond research, he sold. The bonds, which traded around par a year ago, now trade at 60 cents on the dollar. "You do your own research, but then look at Levenson's reports and say, `I must have been asleep during that part of the [company] conference call,"' he says. Gimme Credit's plain-talking daily missives now recommend buying the bonds of SBC Communications (SBC ) and ConocoPhillips (COP )--which most analysts still consider too risky.

At times of uncertainty, money managers look to these pros to help them navigate. By mid-January, 2002, Tyco International Ltd. (TYC ) was on the ropes. The Securities & Exchange Commission was investigating the company for fraud, and the shares were in free fall. Chief Executive and Chairman L. Dennis Kozlowski was on the defensive, telling investors there was nothing wrong with Tyco's accounting. At the time, institutions owned 95% of the stock, and most of the 15 or so analysts covering the company rated it a buy or strong buy. But Technimentals' models suggested the market wasn't going to buy Kozlowski's line for long. By Jan. 18, weekly trading volume was five times the average for the previous 12 months, coupled with a sharp price drop to $45. Lane called about 70 clients on Jan. 25 telling them to sell at $45. "Everyone thought that we were crazy," he recalls.

Sure, Lane would rather have made the Tyco call in early January, when the stock was at $60. Even so, the clients who listened avoided a debacle: Two weeks later the stock hit $30, eventually sinking as low as $7. Now, Lane says to short AutoZone Inc. (AZO ), which he figures could fall to $48 from $78 now, and the drug distributor AmerisourceBergen Corp. (ABC ), which could go from $60 to $40 in the next three to six months. "They're overloved and overowned," he says.

Most money managers hate to admit they take cues even from the best analysts. On Oct. 27, star stock-picker Tom Marsico, manager of the $1.3 billion Marsico Growth Fund, lauded Tenet Healthcare Corp. (THC ), a top holding, in The New York Times. The next day, UBS Warburg's Kenneth R. Weakley released a negative report. A week later, Marsico sold. A press release said "new information" had soured him on the stock.

His coyness is understandable. If you have a secret weapon, why let everyone on Wall Street in on it?

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