These days, analysts are being held more accountable for the information they pass along to their clients -- especially when their investment banks do business with the companies the analysts cover -- so maybe it's time to take a closer look.
Grover's record of covering telecom stocks has been pretty bad over the past year -- that is, unless you did the opposite of what he told you. For the last year, he's been bullish on some of the largest disasters in the space, including two of the largest bankruptcies, WorldCom Inc. (Nasdaq: WCOME) and Global Crossing Holdings Ltd.. Here's a sampling of some of Grover's research, given in reverse chronological order:
- May 10, 2002: Grover issues a note maintaining a Buy recommendation on WorldCom, writing that the company "has one of the better balance sheets in the sector, positioning it, in our view, to survive the malaise and emerge a stronger company in 2H03." This note follows one in the same week that outlines a "12-Step Recovery Plan for WorldCom" that Grover says posits a strategy that "should restore confidence in the company among clients and investors and lead to a less pessimistic valuation."
A month later, the boom is lowered on any remaining shreds of optimism investors might have mustered (see WorldCom Goes Boom).
- May 9, 2002: Grover issues a note reiterating an Accumulate recommendation on Qwest Communications International Inc. (NYSE: Q). The possibility that the telco will sell its directory business gives him confidence that it could return to growth in 2003. He writes: "We have had concerns over the company in the past... However, we believe it makes no sense to 'beat a dead horse' and it's time to get constructive on Qwest."
Qwest's bond rating was junked by Standard & Poor’s two weeks later (see Qwest Trashes Junk Rating), the initial tug in the subsequent unraveling of the company's credibility, as well as its share price (see Carrier Scandals: Who's Next?).
- September 27, 2001: Grover issues an "Action Alert" note on Global Crossing Holdings Ltd., chiding investors who've allowed Exodus's Chapter 11 filing to lead them to "irrational selling" of Global Crossing stock (see Exodus: What's Next?). "No matter how you slice it, in our view Global Crossing is a real winner," Grover writes, reiterating a Buy rating on the stock and a $16 price target.
By Christmas, Global Crossing's bankers had circled (see What's Next for GX?). By January, it was in Chapter 11 (see Global Crossing Falls Overboard).
- August 1, 2001: Grover reiterates a Strong Buy rating on shares of Metromedia Fiber Network Inc. (MFN) (Nasdaq: MFNX), citing extensions it received on its credit facility. He writes: "We continue to believe this name is very undervalued at current levels... especially since it appears MFNX is close to completing a relatively non-dilutive financing contrary to other claims."
Grover continued to defend the stock, even as it traded to under $3, until March 18, 2001, when he downgraded to Hold from Strong Buy in light of its default on debt. Metromedia hit Chapter 11 in May (see MFN Falls Into Chapter 11).
- July 2, 2001: Grover reiterates an Accumulate rating on Genuity Inc. (Nasdaq: GENU): "We look for GENU to turn gross margin positive in 4Q01, aided by a heightened focus on loading its existing $3 billion network with customer traffic."
A year later, Genuity's on the outs with Verizon and staring at bankruptcy (see Genuity Gasps for Breath).
Grover himself did not respond to calls and emails questioning his investment logic. But in these times, as Salomon Smith Barney analyst Jack Grubman is being hauled off for interrogation, the question must be asked: Is there a pattern here? (See WorldCom's Grubby Secrets.)
Kaufman Brothers' chief compliance officer and operations manager Tim Thomas was angry when we questioned Grover's judgment in this light. "I'm not answering any questions," he maintained. But when pressed, he did state that no equity analyst at Kaufman is allowed to hold a direct position in any firm they cover.
The firm can hold stakes, though, and it discloses in every equity report whether it has underwritten or makes a market in securities for the companies being reported on. Kaufman has underwritten and makes a market in securities of Allegiance Telecom and US LEC; it makes a market in securities of Level 3, WorldCom, Metromedia Fiber, and Genuity. It does not underwrite or make a market in securities of Qwest or Sprint.
— Mary Jander, Senior Editor, Light Reading