To OTC Journal Members:
 

How Stupid Can Wall Street Be?

Stock market investors have come through 18 tough months since the bubble burst on the "Dot-Com" revolution. Wall Street is spending millions on advertising to restore confidence. Peter Lynch, the legendary Fidelity Magellan Fund manager, has been trotted out for commercials, and Charles Schwab is asking "Don't you wish you could get investment advice from the person you trust the most?".

There was so much momentum in the technology sector, and so much money to be made on the Investment Banking side, that Wall Street made the critical mistake of believing hundreds of over financed start ups could turn "Eyeballs per Share" into "Earnings Per Share" before they ran out of money. As it has happened so many times in history, greed took the place of common sense.

The economy has been driven into recession as it tries to absorb the oversupply of technology fueled by billions from Wall Street. Now that it appears we are closing in on the end of the recesssion, one has to wonder if there are truly any safe investments left in the stock market with the demise of Enron Corp looming. More importantly, when we examine Wall Street's coverage of Enron thorughout the past six months, one wonders How Stupid Can Wall Street Be?
 

The Demise of Enron Corporation (NYSE: ENE)

Subsequent to Dynegy backing out of its proposed merger, it is now widely expected that Enron will file bankruptcy next week. The stock closed at $.26 on Friday, down from a 52 week high of $84.87. At $84.87 the company was trading at a $63 billion market cap. This will be the largest bankruptcy in US History. Their auditors, Investment Bankers, and the regulators gave no warning or indication this was coming. 

The fall of Enron has created some horrific consequences for numerous parties. Many of the 20,000 employees at the company have seen their nest eggs decimated. The institutions that own this stock such as Janus, Putnam, and Fidelity will ultimately provide a lower return for investors due to the company's collapse.

One of Wall Street's favorite energy behemoths is now in ruins. An investment previously viewed as immune from high risk is now worthless. Wall Street analysts look like complete morons when we examined their track record of calls on this stock throughout the course of the last six months.
 
 

A High Powered Wall Street Analyst's Track Record

Ronald Barone, analyst at high powered and highly respected UBS Warburg, is the analyst assigned to Enron Corp. Many Wall Street analysts have screwed this one up, so don't think Mr. Barone is an isolated case. However, a chronological review of this analyst's comments on Enron make investors wonder why brokerage firms actually pay analysts money for their research, and if investors should ever listen to anything they have to say.

The OTC Journal will take you on the Enron Express through the UBS tunnel starting on July 12, 2001.

• July 12, 2001: ENRON: 2Q Analysis; Raising '02 and Lowering Price Target- "we are raising our recurring 2002 EPS estimate to $2.15 from $2.10"- "our new target $70"- Rated a Strong Buy with the stock trading at $49.22.
• August 15, 2001: "ENRON: Comments on Skilling Departure; Lowering 18-month Target to $60/Share" - "Management was adamant that there are no hidden or undisclosed issues at Enron (such as other shoes to drop) that led to Mr. Skilling's departure.  It reaffirmed that the move is purely a personal one and maintained its recent earnings guidance." Stock is still rated a "Strong Buy", but target price is lowered to $60.
• August 17, 2001: "ENRON: Dust Settling; Likely Headed Higher Than Lower From Here on Out" On August 16th Enron hosted a dinner in NY for senior analysts. "With a heightened focus on shareholder desires, solid bench strength (and its global network franchise soundly in place), we believe Enron will be heading back on track to delivering a cleaner and more openly communicated financial performance". "With the dust settling, we would be aggressive buyers of ENE at current levels. This is particularly true for individuals with a 12-18 month time horizon". Stock is rated a Strong Buy trading at $36.85.
• October 17, 2001: "ENRON: Progress; But Much More Work Ahead - 12-month Target now $47 Per Share" This report came out the day after Enron reported 3rd quarter earnings. "We believe all this bodes well for improved earnings visibility and performance assessment, suggesting that the company is making progress at getting back on track".  However, despite the bullish comments the target price is dropped from $60 per share to $47, "We believe all these factors, when combined with substantially lower group / market multiples, warrant a reduction in our target ENE multiple to 22x projected 2002 EPS". Enron is still rated a Strong Buy trading at $33.84.
• November 1, 2001: "ENRON: A Step in the Right Direction; Lowering Ests / Target to be conservative"- This was the time it was discovered Enron might have entered into some shady dealings through partnerships it had established. "Given the questionable nature of these partnerships, the past level of insider selling (and the overall importance of ENE in the U.S. gas and power markets), we are not surprised that the SEC has rapidly evolved its inquiry into a formal investigation while moving the case to Washington". Enron is still rated a Strong Buy with the stock at $12.50. Target price lowered to $29.
• November 12, 2001: "DYNEGY & ENRON: Just What the Doctor Ordered; Reiterate Strong Buy" 
• November 15, 2001: "ENRON: Flavor >From the Call; Lowering Estimates to More Conservative Levels" "By applying the 25x market multiple against $3.50, we arrive at a 12-month price target of $88 per new DYN share". Enron is trading at $9.91 with a Strong Buy rating.
• November 28, 2001: "ENRON: Lowered Rating to Hold" Barone finally capitulates. " We have lowered our rating on Enron to Hold from Strong Buy. As evidenced by our well-below-the-street EPS projections and warnings of high-risk in multiple past notes, we have been highly cautious of the precarious state of Enron ever since this mess accelerated." Enron is now rated a Hold and a price target of $1 is set.

Conclusion

We don't know Mr. Barone personally, and we certainly realize that management at Enron must have been misleading analysts. However, one wonders how any professional, high paid, high powered Wall Street analyst could be this absurdly wrong. We are under the impression that analysts are paid to provide ideas for investors to make money.

At the OTC Journal we have had our fair share of losers. However, we have always reminded investors of the risky nature of the small and microcap end of the market.

If the best and brightest on Wall Street can be duped this completely, what hope is there for the average investor. The moral of the story- don't put your faith in Wall Street analysts. Despite the high powered firms and huge salaries, they can be as stupid as the next guy.

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