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DO YOU KNOW WHEN TO SELL?

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Now that the market is tanking, doesn't it seem strange that analysts aren't advising us to sell? Is this a conspiracy to keep us holding on to our stocks for the sake of the economy, or is there something else at work?

We've all heard the expression, "If you can't say something nice ... say nothing at all." Well, when it comes to hearing the word "sell," Wall Street is almost always silent. Call it the gag rule, but according to Bulldog Research's Mike Thompson, for all of the tough-talking masters of the universe working the markets, most analysts don't like to insult the companies they cover.

Nobody wants to hear that their baby is ugly. The Wall Street version of ugly is a sell rating, meaning toss the stock. But according to Zacks Investment Research's Mitch Zacks, analysts hardly ever say "sell." "Out of the 7,700 recommendations that we're tracking on S&P 500 companies, we have less than 1% of them coming in as strong sells. It is virtually unheard of for an analyst to recommend a large cap multinational company on the S&P 500 as a sell."

To avoid it, the financial community created its very own Morse Code. Intermediate, accumulate, short-term buy, trading buy: Even the analysts we spoke to had different interpretations for different ratings. Here's what we do know. The "buys" or "outperforms" are both positive. On the flip side, "hold" means sell the stock or, maybe, just hold on; "neutral" is a horserace; and "underperform" means the stock is terrible.

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When asked why "sell" is a dirty word on Wall Street, Sean McGowan, Director of Equity Research at Girard Klauer Mattison, said, "I think it's difficult for analysts to say 'sell' on the stocks that they cover because there are so many constituencies that don't want to hear it. Obviously the companies don't want to hear it." And insulted company executives might cut the line the next time an analyst needs information. Sometimes an analyst's own firm doesn't want to hear it either. Said Zacks, "Think of it this way: an analyst works at a brokerage firm. A brokerage firm makes money by selling stock to individuals, to pension funds, and to mutual funds. If the analyst is saying 'hold,' there is something wrong with that stock. He's telling his investment force, 'we don't want to be selling this stock,' and for someone who's job it is to sell stocks, that's a very strong statement."

Despite all the reasons not to say "sell," Sean McGowan wants to hear it. "What I'm trying to get back to is a more direct, rational approach and say, 'Hey, let's call a spade a spade.'" To wring "sell" recommendations from his staff, McGowan is sponsoring a contest. The analyst with the best "sell" or "underperform" recommendation by year's end wins a cash prize. McGowan wouldn't tell us how much, but he feels so strongly, he's putting up his own money along with some of the company's. Said McGowan, "That stock would have to be the worst performing stock, either in the market or a relative group. It would have to underperform the whole market." When asked how the analysts in his firm reacted, McGowan said, "There are several analysts that generally have a hesitancy to be negative because they are afraid of getting cut off from management."

Still, two months after McGowan's contest began, there have been no takers. "We've had a couple of people that have downgraded and have said, 'You know, without this contest I probably would have left it at neutral or something.' Haven't had anybody come out and say the four-letter word 'sell.'"


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