Note: I wrote this on Feb 2nd 2009 but never got around to publishing it. Still seems relevant, though. I stated my long position in MW on Motley Fool back in Feb, and have stated my short positions in SPG here and there.
After evaluating two stocks recently, and comparing their S&P ratings, I’m more convinced than ever that S&P ratings mean crap and are biased towards clients. Let’s take a look.
S&P has a sell on Men’s Warehouse (MW), who is not an S&P client, because of the “rough retail environment”. Yet they have a strong buy, 5 Star, rating on the highly-leveraged mall REIT Simon Properties (S&P client). Yes, I pick on SPG a lot, and yes, I’m short their stock. But I’ve already done the research, so might as well use it as an example. Here are some fundamental stats on the two:
Men’s Wearhouse: 8 P/E, 0.07 debt/assets (very little debt), strong cashflow, should perform pretty well in a downturn because people are looking for a deal. Current price: $11.75, S&P target: $11
SPG = 25 P/E, .75 debt/assets (it’s actually higher if you look at the sec filings instead the “balance sheet”. Joint ventures have a flattering effect on balance sheets). Faces a horrific next few years because of retailers, especially pricey ones. And they just switched their dividend to 90% stock (aka, they cut the div 90%).
No, this isn’t an apple-apple comparison. I had already done the research on SPG, so I just threw it in there. They’re both exposed to overall retail spending in a big way, so I figured it was close enough to make some comparisons. Plus, SPG has been a 5-Star S&P Strong-Buy pick since $105 or so. It’s currently around $32, and ramping down.
This whole thing just reinforces what Bill Fleckenstein has taught me – Analysts on the whole are biased and reactionary. They react to how a stock behaves, and adjust their price targets and recommendations based on these movements. They don’t really do much forecasting or meaningful research. There are exceptions, of course.