Okay, so I blew it last week and got short on Friday morning, even held over the weekend secretly hoping for a minor global debacle. To make matters worse, all my favorite reads on SI and beyond are throwing up their hands and saying it looks like we'll go higher. I'm doing a little wound-licking this weekend. -g
Here's a good article from the respected Gretchen Mortgenson in today's NYT. The message, simply put, is "still beware of analysts":
March 3, 2002
The Happy Talk Is Still Flowing From Wall Street
By GRETCHEN MORGENSON
A claque of Wall Street analysts who were rah-rah for Enron not long ago ventured from New York to Capitol Hill last week to educate the nation's lawmakers about the way they do their jobs. Those investigating the Enron collapse learned that analysts plumbing the financials of companies whose future securities offerings their firms hope to underwrite often do their best work with their eyes closed and their ears plugged.
A thinking person might expect that, under the spotlight, brokerage firm analysts might be a bit more circumspect about making wildly bullish pronouncements about companies that could benefit themselves or their firms. But a thinking person would be wrong. This is Wall Street.
Consider the Feb. 26 writings of Holly Becker, new media/e-commerce analyst at Lehman Brothers (news/quote ), about Alloy Inc., a direct marketer and media company in New York. Ms. Becker initiated coverage of Alloy with a buy rating just over three weeks after Lehman managed an offering of 6.2 million of its shares. She assigned the stock a price target of $26. The stock closed on Friday at $15.94.
Alloy sells mountain bikes and skateboards to boys and apparel and accessories to girls through Web sites and catalogs. It also publishes AlloyGirl magazine and Strength magazine, aimed at teenage boys. Its shares are down 26 percent this year, but Alloy is still hot. The company's $620 million market value is more than 3.5 times its sales last year.
Alloy has yet to turn a profit, but a reader of Ms. Becker's report might not realize this. Here is one of the reasons she gives to buy the shares: "Alloy's proven profitable business model and high-growth potential should bring further upside to the shares."
But according to the offering statement filed with the Securities and Exchange Commission last month, Alloy has incurred nothing but losses since its inception six years ago ? $76.7 million, to be exact. The company did generate earnings before interest, taxes, depreciation and amortization, or Ebitda, in the most recent quarter, but that measure is not what most investors consider a "profitable business model."
Another reason to buy the stock, Ms. Becker said, is its impressive performance since it went public in June 1999 ? up 15 percent, versus a decline of 17 percent in the overall market. Oddly, Ms. Becker argued that the performance "illustrates Alloy's ability to weather the poor economic environment." Enron had a top-performing stock. Did that illustrate its ability to weather storms?
Alloy's valuation is attractive, Ms. Becker opined, because the shares are trading at just over two times her estimated revenue for the company. The price target of $26 is a result of her estimated cash flows at the company over the next five years.
Ms. Becker did not return a phone call to discuss her Alloy report, which contains several interesting disclosures. In addition to underwriting the recent offering, Lehman makes a market in Alloy's securities, and an analyst who contributed to the report (or a member of his or her household) owns shares in it.
While Ms. Becker prattles, Jonathan H. Cohen, portfolio manager at JHC Capital in Greenwich, Conn., and former chief of software and Internet research at Merrill Lynch (news/quote ), provided some analysis. "Alloy has grown largely through acquisitions," he said. "Its stated strategy is to pay 11 or 12 times trailing Ebitda for the companies it buys. Yet Alloy's shares trade at 134 times Lehman's Ebitda estimate for the year ending January 2002. I have a hard time coming to terms with that discrepancy."
