TAKING STOCK

The herd on the Street

by Malcolm Berko

Dear Mr. Berko: Most Wall Street firms are recommending Intel and I'm considering the purchase of 500 shares at $22 because my broker and his firm believes it will rise to $40 this year. What do you think? You'll probably say "no" because every firm on Wall Street is recommending the stock. Why are you so contemptuous of Wall Street?

B.N.

Springfield, Ill.

Dear B.N.: When everybody seems to agree that something is right - it isn't. Most analysts who work for the New York Stock Exchange brokerages or the huge money center banks are nice guys. Many were dominated by their mothers, had two serious childhood diseases and never had a girlfriend until they left home. Many vote Republican, cheat on their taxes and poker, drink to excess, have a credit line with their bookies, dislike their children and are always constipated. Therefore I trust their research about as much as a chicken would trust a fox in a hen house.

Last year Michael Cliff, professor of finance at Virginia Tech's Pamplin Business College, competed a study of 24,000 analysts' ratings between 1994 and 2005. During that dozen-year period, Cliff found just 457 "sell" ratings. That's 38 "sell" opinions a year, 3.2 "sell" opinions a month - in other words, out of 24,000 research opinions in 12 years, only 1.9 percent of them were rated as "sell." Good golly, Miss Molly, that sounds like, looks like and walks like a good, old-fashioned conspiracy to me.

Neither the lads whom the New York Stock Exchanges hires to police this close-knit fraternity of analysts nor their bosses at the NYSE see anything unusual about this pattern. After all, it's those brokerages whose fees pay their salaries. So whenever I see a "buy" recommendation by an analyst who is not with an independent firm like Value Line, Morningstar, Weiss Research, Moody's, Matrix, Argus, etc., I ask myself two questions:

1. Who pays the analyst's salary?

2. What is the relationship between his employer and the firm of which he issued a "buy" recommendation?

Meanwhile, Intel Corp. (INTC-$22) has been flat as a flapjack despite the numerous "buy" recommendations by Merrill, Oppenheimer, J.P. Morgan, Bank of America, Credit Suisse, Wachovia, Lehman, Robert Baird, Goldman Sachs, UBS and others too numerous to mention. Those are very powerful names and the weight of their combined recommendations can be very persuasive.

But let's face it - many of these brokerages are doing business with, are considering doing business with, have done business with or want to do business in some manner or fashion with INTC, their officers or directors or with an important affiliate of INTC. That's why so many NYSE brokerages recommend that issue.

I know INTC is the largest semiconductor company in the world and owns three-quarters of the microprocessing market. I know that its processors are bundled with chip sets that dramatically incorporate more features into its products. And I know that INTC's capital budget is so huge that its products dominate in cutting-edge technologies. But none of this mitigates the fact that the personal computer market has slowed dramatically since the mid-1990s and that INTC's expansion opportunities are limited.

I'm also mindful that AMD has quite impressively narrowed its technology gap with INTC and that one single misstep by INTC would give a significant market share gain to AMD. As you know, AMD is INTC's largest competitor and its surging revenue is making the INTC people nervous. INTC shareholders should also be concerned about AMD's recent purchase of ATI, a smaller rival with platform solutions so impressive that some observers consider it superior to INTC's. All those things concern me and more.

INTC is now just a darned good chip maker with decent growth potential. But there's nothing about the company that screams, "Buy me!" or is compelling enough to recommend a $10,000 (500-share) investment. There are too many issues out there that pay better dividends, that have better revenue and earnings potential, that have 70, 80, 90 or 100 million shares (not 6 billion) outstanding and that should provide better capital appreciation potential.

In the past five years we've enjoyed a fairly good market and INTC has been prominently recommended by everyone on Wall Street, but the shares have done "bupkis." During the past three years, the shares, try as they could, would never trade over the $28 level even with improving revenues and earnings.

INTC is a tired, $40 billion revenue company and I'm willing to wager a dozen glazed, Krispy Kreme doughnuts delivered hot to my office at 9 a.m. every Tuesday and Thursday vs. a plugged nickel that INTC won't see $40 this year.

So "phooey" on Wall Street research.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.
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