What's Wrong With RIM Analysts?

By Eric Jackson12/29/10 - 08:00 AM EST

NEW YORK (TheStreet) -- Sell-side analysts on Wall Street still have a terrible reputation.

You would think that after Jack Grubman's stock-touting at Citigroup(C_) 10 years ago and all the efforts to erect "Chinese walls" between research and investment banking, that things would be better today. But, deep down, we all know they're not.

Here's one example that made me scratch my head at what's going on in the minds of Wall Street analysts.

I am short Research In Motion(RIMM_). Therefore, I listen to the company's earnings calls because I find the Q&A section of those calls the only time I can hear the unfiltered views of the co-CEO, Jim Balsillie.

Most of the time in public, Balsillie reads from prepared remarks. The Q&A is the only time I hear him think on his feet and articulate his company's strategy. (You know my position, so you know what I think of his performance at these moments.)

RIM is a fairly big company with more than 50 analysts covering it, according to Yahoo! Finance. Yet I've noticed that RIM always limits the length of its earnings calls to one hour. The call start at 5 p.m., and RIM reminds everyone that the call will end at 6 p.m. Sometimes this leaves 40 minutes for Q&A and sometimes this leaves only 15 minutes -- it all depends on how long prepared remarks are.

What has surprised me about the Q&A session is that, despite the 50-plus analysts covering the company, the same people keep getting called upon to ask questions during this short window.

My first thought was that the fix must be in. I assumed Balsillie was going back to his buddies to give them access. These buddies -- I assumed -- had large price targets on the stock. I assumed the more critical analysts weren't getting called upon.

........

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How to make Wall Street Analysts Relevant

They are a highly sought after group of commentators on CNBC and the business press: Wall Street Analysts. Often, they have impeccable educational pedigrees and years of experience at bulge bracket investment banks. A major business story in BusinessWeek, Barron's, and the WSJ almost always has a couple of quotations reserved for an analyst who covers one of the companies under the microscope.

Back in the halcyon days of the late '90s, these curious creatures even broke into the ranks of business celebrities -- almost as famous as the entrepreneurs and managers they covered. Mary Meeker of Morgan Stanley was trumpeted as the "Queen of the Net" for her coverage of the Internet space. Henry Blodget (pictured above) made the audacious prediction that Amazon would hit $400 (and it did shortly thereafter), allowing him to ditch the house of Oppenheimer for the more luxurious digs of Merrill Lynch. And Jack Grubman of Citi was the telco czar -- for a time.

Of course, we all know what happened next. Only Mary Meeker came out of that mess with her dignity in tact. The telco and internet analysts saw their importance dim, as the industries they covered waned. Yet, for some inexplicable reason, analysts remain "go to" people for the business media.

Turn on CNBC during the trading day and you're bound to see an analyst (or two on a split screen) helping us digest the numbers for Company A's most recent quarter. Presumably, the media goes to these people because: who better to comment on a company than someone who is paid to study it? Their employers (the investment banks) are only too happy to put them out there to chat, as a little publicity never hurt anyone.

Yet, here's a basic question: who among us has ever garnered an insight from one of these talking heads? They are prone to regurgitating back the most recent numbers for the given company. If the numbers hit or surpassed, they shower praise; if they missed, they identify that some problems exist. But, too often, the commentary is reporting facts, rather than strategic insight.

For example, in the Spring of 2005, Google had a blow-out quarter. Jordan Rohan, an RBC analyst, who gets attention because he covers Google and never shies away from a media interview, grudingly acknowledged their success this way: "Google's defying the logic of growth companies." About a year later, Google's stock took a hit, after it mistakenly posted financial projections on its website. The company has resisted giving Wall Street analysts guidance. Jordan disapproved, saying: "We believe Google management is creating unnecessary volatility by refusing to issue financial targets." Additionally, he complained that management's capital spending was "unfathomably high." After Google's most recent blow-out quarter, Rohan struck a congratulatory tone: "This is an eye-opening and refreshing quarter for Google investors."

What's wrong with this synopsis?

1. Analysts, unlike the companies they cover, rarely are accountable for what they previously write. No one ever goes back and studies whether their ability to predict the future actually panned out.
2. Analysts are chronic rear-view mirror drivers. These are bright Harvard MBAs. Yet, I am less interested in what has happened to a company compared to what will happen. I can read the press release or listen to the conference call. Where is the insight into what will happen down the road?
3. How many original ideas do you recall hearing from analysts? The kinds of thoughts that made you stop and rethink how a space was developing? I frankly can't think of any. I can think of outlandish price targets -- but few singular thoughts.
4. Analysts' insights are free to all who watch CNBC and, therefore, worthless. Free information is a commodity. For these analysts and their companies, the name of the game is publicity for the investment banking team. Have you ever noticed you never see analysts from hedge funds on CNBC? Why? Their intelligence is valuable and their firms will not easily part with this.

So, what are some solutions for the problem of more talking head analysts on CNBC? Here are a few modest suggestions for how to make Wall Street Analysts more relevant to market observers:

1. Hire McKinsey/Bain/BCG strategy consultants (or others with a similar Strategy bent) as Analysts. A big problem with analysts is that they are too analytical. It would be much more interesting to hear comments or read reports from those with a background on saying what the latest results mean for the future and how well the company is strategically positioned.
2. Track Analyst Performance and report it. While Institutional Investor magazine and others do analyst ranking, what's missing is analyst accountability. Big business periodicals should track analyst predictions and then show how they actually did. If someone is perenially a poor performer, there's probably a better profession for him/her. As Dr. Demming, the grandfather of Quality, said, 'you can't improve something, if you don't measure it.'
3. Reward Analyst Creativity. There should be the equivalent of a Pulitzer Prize for Wall Street research. In the meantime, compensation should also follow original ideas that help banking clients make money. If you don't pay for it, you won't see it. The creativity should also drive more publicity for the firm.

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