When companies behave badly to analysts

/ Source: CNBC

Under the Wall Street global settlement, which is a year old this week, a lot of focus has been placed on analysts.  But attention is now being focused on how companies treat the analysts who cover them.

Sheryl Skolnick says she was an analyst shunned because of one four letter word: Sell.

“My impression was that if I had had a buy rating, I would have gotten in touch with them a whole lot more easily,” said Skolnick, an healthcare industry analyst at Fulcrum Global Partners.

Skolnick's won The Wall Street Journal's Best on the Street award 4 times. She's covered healthcare companies for a decade. She also has a 5-star rating on Starmine, a Web site that rates analysts.

But even with her track record, Skolnick says her phone calls to Health Management Associates went unanswered. She was left off the list of analysts on the HMA Web site. And in the past three years, she had not received a single invitation to the company's investor meetings — until last week, when HMA's CFO and CEO called.

“Had CNBC not expressed interest in this issue and pursued management and asked why there was not contact between me at Fulcrum and them at HMA, it never would have happened,” she said.

An HMA spokesman says it was Skolnick who stopped calling the company, and that it simply returned her call last week. The company says it was not retaliating for the "sell" rating.

But if  it were, there are no rules to stop it.

“That gives companies the power to favor analysts they like,” said Skolnick, “and suppress the analyst calls they don't like by controlling access and by retaliation.”

“Companies are going to have to get used to the fact that they are not all going to have “buy,” “strong buy” ratings on their companies,” said Lou Thompson, CEO of the National Investor Relations Institute. “That those ratings will be more realistic. Therefore it's really important that companies not retaliate against analysts. We don't see this as a major problem. But when this happens, we have to have a zero tolerance level for this.”

The Securities and Exchange Commission says it's up to the New York Stock Exchange and the Nasdaq to crack down on their member firms for this. But the exchanges say a they are not looking at the issue. And that allows companies to behave badly:

  • WorldCom called Precursor Group's Scott Cleland "idiot analyst." He was among the first to detect the fraud at the telecom company.
  • Last year, on a Fresh Del Monte conference call, the CEO told a BB&T Capital Markets analyst who had issued negative research that she was "covering us without our will, and we would not like you to ask questions on this conference call, if you may." (Fresh Del Monte and BB&T did not return messages seeking comment.)
  • And Skolnick wasn't the only target of Health Management Associates. Last month, after a UBS analyst issued a negative report, HMA fired back with a 3-page release that said the analyst’s report contained "inaccurate" and "erroneous" assumptions. (An HMA spokesman says it was simply correcting inaccuracies.  But UBS stands by its analyst.)

It may seem as if it's the analysts who suffer most from reprisals. But analysts like Skolnick say it's actually the investor who has the most to lose.

“If those of us who were critical are ignored, are shunned, are treated as pariahs in any way shape or form I think it speaks volumes to the message the company is sending to the street and to those shareholders who would like to have the full and complete story,” she said.

Investors may not realize this, but companies wield a lot of power in dealing with analysts. Not returning phone calls, not selecting an analyst to ask a question during a conference call, not inviting analysts to meetings — all these measures, taken by companies, could effectively shut an analyst off.

And in an age where analysts are expected to issue less biased, independent and sometimes unfavorable research, many say these methods of retaliation must be reined in.