Investment analysts formerly known for their fawning coverage of cash-burning Net firms are showing a new face lately.
And frequently, it is not a very nice face.
A case in point this past week was Merrill Lynch analyst Henry Blodget, a man famous for issuing outrageously optimistic price targets on Internet stocks at the height of the dot-com boom.
Blodget -- once notorious for tacking "strong buy" ratings on stocks -- was certainly not acting like his old self Friday, when he issued a report on cable Internet giant ExciteAtHome that sounded downright mean.
In the report -- released just three days before a statement from ExciteAtHome's ex-auditor that came to a similar conclusion -- Blodget speculated that the broadband Internet provider was on the brink of bankruptcy.
With $1 billion in debt, a dwindling stock price, and a cash-burning business, Blodget concluded that the firm held "little if any value for equity holders."
A close reading of the company's most recent quarterly earnings report, he wrote, "makes it clear that the company's prospects are even worse than expected based on cash concerns, valuation, and a highly uncertain business outlook."
"The most likely scenario," he concluded, "is that the company declares bankruptcy, reorganizes and sells pieces of itself to cable providers or other ISPs."
All told, it was not a very pleasant bit of analysis for ExciteAtHome, a company whose stock was already trading for well below a buck.
"It was pretty scathing," said David Lichtblau, vice president of analyst ratings firm StarMine.
But while the derogatory tone of Blodget's report is striking, it's not unique among investment bank analysts this year.
Faced with the absolutely awful performance of tech and Internet stocks, along with some equally dismal earnings reports, analysts have been quick to downgrade companies in the sector.
This year, Lichtblau says investment banks have approximately twice as many "hold" ratings on stocks compared to "strong buy" ratings. This is quite a turnaround from the height of the tech boom, when the ultra-optimistic "strong buy" rating was far more prevalent than the uninspiring "hold" category.
The motive is obvious. Analysts who maintain "strong buy" recommendations on stocks that then proceed to lose 90 percent of their value wind up looking stupid.
If anything, the types of analysts most admired on Wall Street this year are exactly the opposite of those who made it big a couple of years ago. Formerly, the unwritten rule was whoever makes the most outlandishly positive forecasts wins the respect of the market. Now, it seems to be those with the grumpiest, most pessimistic outlook who are most likely to ascend to star status.
Analysts may also be taking a less buoyant tone because securities regulators, Congress and class-action lawyers are watching them like hawks.
In the wake of congressional subcommittee hearings this summer on in-house practices of investment banks and their analysts, the U.S. Securities and Exchange Commission issued an advisory warning to investors to take Wall Street stock ratings with a grain of salt.
"While analysts provide an important source of information in today's markets, investors should understand the potential conflicts of interest analysts might face," the agency advised investors. It's not uncommon, for example, for analysts to work for firms that underwrite or own securities of the companies they cover. Analysts may also personally own stocks in companies they follow.
Investment bank analysts have also been targets of lawsuits brought on behalf of investors who purchased stocks they recommended at the peak of the dot-com bubble.
Last month, Merrill Lynch paid $400,000 to settle a case brought by an investor claiming he was misled by Blodget's stock recommendations. Merrill did not admit wrongdoing as part of the settlement.
Earlier this week, Judge Milton Pollack of U.S. District Court in Manhattan tossed out a similar complaint brought against Morgan Stanley analyst Mary Meeker regarding her overly optimistic forecasts for eBay and Amazon.com. Pollack wrote that the complaint "is hopelessly redundant, argumentative, and has much irrelevancy and inflammatory material."
The dismissal of the Meeker case should bring some relief to beleaguered investment bank analysts, who have been getting an oversized share of the blame for stock market losses, Lichtblau said.
Still, he added, analysts need to be more willing to issue "sell" ratings on poorly performing companies if they want to gain the respect of investors.
He criticized Blodget for not being quite harsh enough in his appraisal of ExciteAtHome. Overall, Lichtblau said the Merrill analyst has been better than most at predicting the performance of ExciteAtHome this past year.
Blodget actually issued a downgrade of the stock in April, before it took a further dip. He also ranked No. 3 in StarMine's list of top-performing analysts covering the stock. (The top ranking goes to Davenport & Co. analyst Drake Johnstone, who has a "strong sell" rating on the stock.)
But although the Merrill analyst predicted the company would fold, he maintained a "neutral" rating on the stock.
"If you think it's going bankrupt, that's not really a neutral stance," Lichtblau said.
