Bloomberg – 06 oct. 2010
Meredith Whitney, the bank analyst who jumped to celebrity from obscurity by correctly predicting Citigroup Inc.’s dividend cut, is having less success divining stock market winners and losers.
Since Whitney founded her own firm last year, about two- thirds of her picks have fared worse than market indexes. Missed calls include Visa Inc., the payments network that fell 14 percent after Whitney called it her “single best buy,” and credit-card issuer Capital One Financial Corp., which tripled after she urged clients to sell. Whitney’s recommendation to sell bank stocks propelled her to fame during the financial crisis. Time magazine dubbed her one of the world’s most influential people and Fortune put her on its list of the 50 Most Powerful Women. Michael Lewis’s best- seller “The Big Short” chronicled how Whitney’s prediction on Oct. 31, 2007, that Citigroup would lower its dividend helped erase $390 billion of value from U.S. stocks. “She can move the markets, her opinion is extremely worthwhile, but she does not bat a thousand — nobody does,” said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Inc., referring to a measure of baseball perfection. “The calls that she’s making may not be the best calls right now, but a year from now, who knows?” said McCormick, whose company oversees $2.7 billion.
On Her Own
Whitney, 40, a graduate of Brown University in Providence, Rhode Island, set out on her own to found Meredith Whitney Advisory Group LLC after leaving Oppenheimer & Co. in February 2009. She didn’t respond to requests for comment. “If you’re going to invest in a stock, it’s a long-term investment,” she said yesterday in an interview on CNBC. “That’s how my ratings are based.” Whitney’s research reports say her recommendations are meant to project where prices are headed over the next 12 months. Bank analysts struggled to make accurate predictions after the collapse of the subprime mortgage market and ensuing global credit contraction forced Wall Street banks to curtail risk, unwind government bailouts and adjust to the biggest regulatory overhaul since the 1930s. Even the best-performing Wall Street firms and individual stock pickers failed to predict the fall and rise of most big financial stocks, according to rankings in the November issue of Bloomberg Markets magazine. New York-based Goldman Sachs Group Inc. won the No. 1 spot by making 30 accurate calls on the 79 financial stocks its analysts follow. KBW Inc. analysts, including Sanjay Sakhrani, ranked second. Whitney didn’t make the list.
Vince Farrell, chief investment officer at New York-based Soleil Securities Corp., said institutional investors don’t expect analysts to be right about stock recommendations most of the time. “What you really want out of the sell-side analyst is more the direction of an individual company,” Farrell said in an interview today with Bloomberg Radio’s Tom Keene. “Just give me a whole lot of facts and figures and I’ll make the decision,” Farrell said. Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, said his firm has cut back on investments in banks because their financial statements have become too opaque to understand. “It’s just a very, very difficult group,” said Sorrentino, whose company oversees $13.3 billion. “Return on equity, return on assets, net interest margin — the classic things that a bank analyst used to go to — they’ve almost become meaningless numbers.”
Before Whitney, analysts who soared to mainstream celebrity found it fleeting when the market turned against them. Abby Joseph Cohen, senior investment strategist at Goldman Sachs, made her reputation with a bullish view of the stock market that proved true through the 1990s, before the Standard & Poor’s 500 Index sank for three straight years beginning in 2000. Morgan Stanley’s Mary Meeker, dubbed the “Queen of the Net” by Barron’s magazine in 1998, receded from the spotlight after Internet stocks imploded. Whitney made six accurate and 13 inaccurate stock forecasts through Sept. 30, based on annualized returns, including dividends, on each of her 19 recommendations, when compared with the performance of the S&P 500. She was right seven times and wrong 12 against the 81-company S&P 500 Financials Index.
Buy and Sell
Correct predictions are stocks rated “buy” that outperformed the indexes or a “sell” that underperformed. A rating of “hold” or “neutral” is right if the stock underperformed or matched the indexes, unless it had been upgraded from sell. Whitney’s first stock call as her own boss came on March 4, 2009, when she started Goldman Sachs at “neutral,” a rating investors may interpret as a signal to sell. The stock surged 75 percent in about four months, providing an annualized return that beat the S&P by 281 percentage points. Other misses came on April 1, 2009, about a month after stocks had begun to rebound, with a wrong-way “sell” call on McLean, Virginia-based Capital One and a “neutral” rating for American Express Co. Capital One more than tripled through June 14 of this year, beating the S&P 500 by 129 percentage points on an annualized basis. After an upgrade to “hold,” it underperformed the index by 26 points. New York-based AmEx, the biggest credit-card issuer by purchases, almost tripled and was last year’s top performer in the Dow Jones Industrial Average.
Wells Fargo & Co., the largest U.S. home lender, fared better than the indexes during the time Whitney urged clients to sell and worse after she upgraded the San Francisco-based company to “hold.” Discover Financial Services, the Riverwoods, Illinois-based payments network rated neutral in August 2009, has since outperformed the indexes and larger rivals Visa and MasterCard, the only two firms that have Whitney’s highest rating of “buy.” She called Visa her “single best buy” during an interview with Bloomberg Radio on May 4, 2010, about a week after the stock reached an all-time high. Among the 13 other companies she covers, Whitney has one sell recommendation, on Atlanta-based SunTrust Banks Inc. She rates Jefferies Group Inc. “outperform,” and Citigroup Inc. “underperform.” She rates 10 companies “hold.” Since Whitney began covering Visa and MasterCard on March 10, the two companies have underperformed the broader market and the S&P 500 Information Technology Index.
Whitney’s accurate predictions have provided returns that diverged less from the S&P indexes than her wrong-way calls. After missing most of the increase in Goldman Sachs shares, Whitney raised the company to “buy” on July 13, 2009, and held that rating for three months. The stock rose 25 percent, providing an annualized return that outperformed the S&P 500 by 42 percentage points, while underperforming the financials index by 28 points. She downgraded the stock to neutral on Oct. 13 of last year, and it has since underperformed both indexes. Whitney’s accurate calls include “neutral” or “hold” ratings on Morgan Stanley, JPMorgan Chase & Co., U.S. Bancorp and Pittsburgh-based PNC Financial Services Group Inc. Morgan Stanley has returned 3.5 percent on an annualized basis and JPMorgan 23 percent since she started coverage on the stocks on April 1, 2009, compared with 28 percent for the S&P 500. Clients who took Whitney’s advice on April 1, 2009, to sell Citigroup, the company that cut its dividend 11 weeks after she said it would, missed out on a 46 percent gain. The S&P 500 returned 45 percent and the financials index 61 percent. A company rated sell is “expected to perform significantly worse than the peer group” over a year, Whitney writes in her research notes. Whitney is scheduled to deliver the keynote address tonight at the annual 25 Most Powerful Women in Banking awards dinner in New York sponsored by American Banker and U.S. Banker magazine.