The naked redhead and the analyst’s point of view
A veteran security analyst takes a look at the profession today and sees that the same words don’t mean the same thing to everybody.
You’ve probably seen the terms many times. Outperform, market perform, underperform.
Do they mean buy, hold and sell, or what? Here’s one interpretation from a seasoned Wall Street analyst.
“’Underperform’ has become a rarely used code word meaning ‘we don’t like the stock but don’t want to annoy the management by saying ‘sell’.”
Those are the words of Mr. Raymond DeVoe Jr., who knows the ropes, having spent many years as a security analyst. Today he views the profession with a skeptical eye in the pages of The DeVoe Report.
Looking at the incoming earnings reports that are making headlines and moving the markets, he reflects that the profession has changed. But he also recognizes that people can see the same thing very differently.
Which can be proved in the case of the naked redhead. But we’ll get to that in a moment.
First, we will see how security analysis has changed.
A landmark day
On May 1, 1975 was a landmark day on Wall Street. The Securities and Exchange Commission abolished fixed commissions and mandated negotiated rates. (In Canada, fixed commissions were never eliminated, but the advent of discount brokers changed the landscape considerably.)
Before that date, the average commission was about 45 cents per share, but it could be higher. Rummaging around in his files, Mr. DeVoe finds an order for the purchase of 2,000 shares of IBM. The commission was $1,500, or 75 cents a share.
Today it’s closer to 5 cents a share, sometimes a penny a share.
That changed the profession dramatically. A further change of attitude took place during the stock boom of the 1990s, this analyst says. Security analysts became subservient to investment banking, where the fees were far higher than commission business.
Sugar coating the outlook
Today people in charge of brokerage compliance are wary that the sales force is trying to put something over on them, says Mr. DeVoe.
“Security analysts of my time developed similar reactions to the managements of companies they covered — that they were sugar coating the outlook — and suppressing anything negative.”
This bred a healthy skepticism that has stayed with analyst to this day. “I was cut off by management many times when I recommended the sale of their stock or had an opinion that differed from their ‘guidance’.”
Of course, rival companies were more than willing to tell him how the firm had fouled up, how often it had “goosed” earnings and so on.
The market judges earnings reports according to whether or not a company has “met guidance” or “beat guidance.” When Caterpillar recently reported a deficit, a CNBC commentator reckoned that the company “didn’t guide low enough.”
Ha, says Mr. DeVoe. He reckons that “business conditions were deteriorating so rapidly prior to the end of the quarter that management did not have enough time to adjust their ‘guidance’.”
The naked redhead
It’s all a matter of interpretation, or misinterpretation. And that brings us to the naked redhead.
Named to head the Communications Committee of his firm some years ago, Mr. DeVoe signed up for a comprehensive course in communications.
At the last session, the theme was resisting preconceived beliefs in order to be objective about communications requirements. Towards the end of the slide presentation, an out-of-context slide was slipped in for a fraction of a second.
“It showed an attractive, naked young woman lying on her back on a bed, her head over its side, looking upwards at the camera with her long red hair cascading to the floor.”
The instructor cut in. “All right, what colour was the telephone and what model was it?” Mr. DeVoe hadn’t seen any telephone. One hand in the class of 40 went up. It was a pink Princess phone, said the only woman in the group.
What you want to see
Most of you, said the instructor, were conditioned by gender to see what you wanted to see. “Do not make the same mistake about preconceived conditioning when making decisions concerning communications equipment.”
Adds Mr. DeVoe: “Point made — and the same applies to economics and the stock market as well.”
As a security analyst, he adds, it is fairly easy to see the patterns of companies under stress. The question is, do we — and this goes for investors as well as analysts — see things they way we want to see them, the way others want us to see them, or in the hard, cold light of day?
His lesson from the naked redhead, concludes Mr. DeVoe, “is that it is very easy to see what you want to see — the familiar. But then it is very easy to overlook something quite significant.”
By the time we see an analyst’s report, many different viewpoints have already gone into it. It’s still up to investors to make an intelligent analysis of its contents. Keep your eye squarely on the Princess phone.
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