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Wall Street Research Being Looked at

November 22, 2002

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WASHINGTON (AP) _ In the year since the spotlight turned on Wall Street analysts’ conflicts of interest, their research has lost much of its irrational exuberance. But it has yet to regain the respect of institutional investors.

Although analysts are more willing to slap ``sell″ ratings on stocks these days and are less likely to put a positive spin on everything, the overall quality of Wall Street research hasn’t changed much, institutional investors say.

Some investors grouse that despite the uptick in sell ratings, it’s still not enough, given the state of the stock market.

What’s more, they say, it’s a lot easier to be negative when stocks are downtrodden _ the real test will be when a bull market returns.

``What we’re seeing is a step in the right direction _ clearly, everything can’t be a ‘buy’,″ said John Maloney, president of money-manager M&R Capital Management Inc.

``But the bigger issue for me, rather than buy, sell or hold, is that the quality of the analysis still tends to be superficial. Accounting issues are still very much glossed over.″

Under pressure by regulators, sell-side firms have taken numerous steps to clean up their research, which had come to be seen more as a marketing tool for investment banking than as a roadmap for investors.

Among other things, new rules require firms to provide historical data on their ratings and price targets, disclosure about possible conflicts and more explanation of what their ratings mean.

One of the most visible effects of these changes is the number of ``sell″ ratings. As the bull market came to a crashing halt two years ago, fewer than 1 percent of Wall Street stock recommendations were sell; today, on average, ``sell″ ratings account for 9 percent and 10 percent of total recommendations, according to Zacks Investment Research in Chicago.

Also virtually gone are the days when reports carried overly enthusiastic titles like, ``The Pot of Gold at the End of the Rainbow,″ which one Morgan Stanley analyst used on a report about Copper Mountain Networks Inc. as its share price was in the midst of a free-fall in September 2000.

Analysts ``would do this and try and get coverage by the media, and now I don’t think they want any coverage,″ said Mitch Zacks, director of research at Zacks, which offers independent research and also tracks the industry.

Some analysts appear more willing to call things as they see them, rather than painting everything in a positive light.

One example of this is UBS Warburg’s Oct. 28 downgrade of Tenet Healthcare Corp., on concerns about certain Medicare funding, said Tim Connors, director of research for value equities at Delaware Investments.

Another example is a J.P. Morgan Chase & Co. report earlier this month on General Electric Co., in which an analyst raised concerns about the amount of debt at its financial-services businesses and how that could affect GE’s strategy of buying companies with cash.

Still, Connors remains skeptical. ``I haven’t seen that change in behavior widespread,″ he said.

While the various changes should result in fewer individual investors being misled, Wall Street still lacks much of the in-depth research that professional investors want.

``Most sell-side research doesn’t draw conclusions. It’s generally informational in its nature,″ said Andy Reckles, a general partner in the Palisades Equity Fund, a private equity fund which uses Wall Street research for basic data on companies, but not for investment decisions.

Indeed, a recent study by Greenwich Associates found that 71 percent of institutions said they are increasing their reliance on in-house research, though some of that may just be talk, since only 23 percent said they plan to hire more analysts in the next six to 12 months.

The study also found that 48 percent of investors said they are more likely to use research produced by so-called independent firms, or those without investment banking ties.

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