By JACK HOUGH
On Wall Street, "sell" recommendations are exceedingly rare. Perhaps for that reason, they tend to be worth following.
Among companies with the most sell recommendations is Eastman Kodak, which the Wall Street Journal reports this week is edging closer to a bankruptcy filing (see "Kodak Teeters On the Brink").
The large, mid-size and small companies in the S&P Composite 1500 index together have attracted more than 20,000 published analyst opinions on what to do with their shares. Barely 200 of these say to sell. Why? One innocent explanation is that clients of these analysts' firms are more interested in hearing about stocks to buy than ones to sell, because most retail investors don't engage in short-selling, or betting against stocks.
Another, not-as-innocent explanation is that the same firms that issue opinions on shares also court the companies under their coverage for lucrative investment banking business. Over the past decade, regulators have taken steps to reduce conflicts of interest among analysts, and studies show the link between investment banking relationships and "buy" recommendations has weakened. Analysts have also become a bit less optimistic in their recommendations, but a culture of sticking with "buys" and "holds" and avoiding "sells" remains.
Research by Kent Womack, a former Goldman Sachs executive who taught at Dartmouth for 16 years before heading to the University of Toronto in 2010, suggests two things to keep in mind when using analysts recommendations to inform stock-picking decisions. First, fresh recommendations are more telling than longstanding ones. That is, recent opinion changes tend to have more predictive power than the overall consensus of opinions. Second, "sells" tend to be more prescient than anything else. Analysts who take this rare stance, it seems, often have good reason.
Among thousands of North American companies, just three have at least five "sell" recommendations: Research in Motion (RIMM),
Note that plenty of other companies appear to be in worse shape than these but attract lower levels of analyst coverage, and thus fewer "sells". Note, too, that "sell" recommendations reflect analysts predictions for share price declines, and not necessarily deeper financial trouble.
A second search for companies with two or more "sell" recommendations, including at least one issued in the past four weeks, turned up seven names. Two of them have three "sells" apiece: Safeway, a profitable grocer that faces rising competition from Wal-Mart (WMT)
The other five have two "sells" apiece. Sun Healthcare Group (SUNH)
Insurer Coventry Health Care (CVH)