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Analyze This

Wall Street reforms have succeeded in making stock analysts less corrupt. But that doesn’t mean they’re less-often wrong.

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Maybe they aren’t corrupt: Maybe they’re just stupid. That’s the logical conclusion you would have to reach about the stock-analyst community if you read the reports written about AT&T Wireless, one of the most widely held stocks, shortly before its recent 100 percent ascent. Virtually every major Wall Street firm had a sell on AT&T Wireless at the time of its levitation from $7 to $14 at the hands of multiple bidders.

But if you reached that conclusion, you would be wrong. The analysts weren’t stupid. AT&T Wireless was arguably the worst company in the business of wireless, losing customers, losing calls, losing money. In fact, the outfit was arguably the worst-run national consumer operation in the country, and even though the possibility of huge investment-banking fees loomed for anyone who championed the company, barely an analyst was willing to prostitute himself with a buy to earn those fees. In fact, you could argue that the lack of support for AT&T Wireless before Cingular’s magnificent $15 bid stemmed from the reforms instituted by Eliot Spitzer. That’s right: Good-government measures on Wall Street resulted in some honest-to-Betsy analysis for once. And it was still dead wrong!

How can reasonable, highly paid—oh, make that overpaid—analysts, with business degrees from Harvard and Stanford and Wharton, consistently miss the best opportunities for investors (whether the analysts are corrupt or not)? Perhaps because they needed fine-arts degrees, not business sheepskins. When you study fine arts—my first inclination before I became addicted to stocks—you learn that art in the latter part of the last millennium was all about a struggle not to be limited by the four walls of the canvas. The Modernists—the Braques, the Picassos—all felt similarly constrained by the two-dimensional nature of the medium and sought to go beyond its borders to develop something deeper and more compelling. Heck, that’s exactly what these analysts needed to do with AT&T Wireless. They needed to think big, think creatively, think outside the four walls of the 10-Q filing!

All the analysts looking at the canvas of crummy numbers saw was terrible management, and they had a sense that when wireless portability (the FCC’s move that allowed you to switch phone numbers) came, it would be the death knell of AT&T Wireless. In fact, throughout the winter, every analyst took his swipes at AWE, the inapt symbol of this shaky cell-phone provider. Had they not been so constrained, they would have seen that the third-largest carrier had no choice but to put itself up for sale, exactly what its competitors were salivating for, hence the instant auction and price jump.

“Analysts need fine-arts degrees. Like the modernists, they need to think creatively, think outside the walls of the 10-Q filing!”

Ironically, the analysts couldn’t see this in part because of the new goody two-shoes aspects of Wall Street research. The Spitzer reforms forbid the kind of over-the-wall contact with the bankers that might have produced an inkling that this company had multiple suitors willing to pay double the price. Without that “corruption,” these analysts could rely only on assessing the old metrics—that canvas again—of the business.

Does this AWE lesson mean that Wall Street’s stables didn’t need the Spitzer brooming? Hardly. It just means that the analysts have to be more creative, more willing to wander outside the confines of the company and their own prison of endless extrapolation of current business trends. No doubt that’s a tough assignment. The best analyst on AT&T Wireless, for example, Morgan Stanley’s Simon Flannery, the man who got me out of Qwest 25 points ago because he foresaw the darn thing crumbling, was the single most blindsided analyst on AT&T Wireless. That’s because he had done an extensive survey of who would be hurt the most by wireless portability. He correctly nailed AT&T Wireless as the biggest loser and went from a hold to a sell at $7! Ah, cruel world! Two weeks ago, Flannery went to a buy at $13.58 on “merger arbitrage grounds.” Sell at $7, buy at $13—now that’s value added. Yet his homework made him do it.

If the smartest and best, like Flannery, screw it up, I don’t hold out hope for the newly reformed process to generate a lot of capital gains for you. But I know tons of money can be made betting against the community precisely because it is so trapped by the group-think of the obvious analytic tools. For example, readers of this column may remember that I told them to pack the boat to the gunnels with AT&T Wireless precisely because it was so hated. Now I’m seeing the exact same process play out with Charter Communications, the nation’s third-largest cable company. Once again, a terrible operator has consistently disappointed by the standard measures, and blinded analyst after analyst has taken his turn whacking this cable piñata with hold-to-sell commentary. Yet Charter, like AT&T Wireless, holds the key to the next round of consolidation for an industry that needs to amalgamate fast or get beaten by satellite competitors like EchoStar and News Corp.’s DirecTV. Once again, every analyst is bound by the usual yardsticks and an inability to talk to bankers, courtesy of Spitzer. If analysts weren’t so constrained, they might recognize that there are multiple buyers out there just waiting to bid for this company simply because it is so poorly run that its acquisition even by the newly recapitalized Adelphia makes sense. Using analysis more suited to MoMA or the Guggenheim than the NYSE or the NASDAQ, I peg Charter, which I own at $4.40 for my private trading account (see below), as a double by year-end.

It’s nice to see that corruption isn’t the reason these analysts can’t make you money. Kind of lends a sweet Capra-esque notion to a business that had been as dirty as Jimmy Stewart’s opponents in Mr. Smith Goes to Washington. Alas, innocent or tainted, these guys simply can’t be listened to if you want to get rich on Wall Street.

James J. Cramer is co-founder of TheStreet.com. At the time of publication, he owned stock in Charter Communications. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.


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