Analysts Continue to Boggle the Mind

There are 3,400 sell-side research analysts in the United States. No matter what they do, they’re not going to get too many flattering comments from me on this blog. First off, don’t get me wrong, there are some good analysts out there. They are tough to find, and likely only number in the dozens, but they do exist. But for the vast majority, they baffle me. Let me explain two extremes.

First, we have Sears Holdings (SHLD), one of the largest retailers in the country with more than 3,000 stores and $50 billion in annual sales. Guess how many analysts cover SHLD? (Hint: take the “under”). The answer is 6. That compares with 23 for Target (TGT), 24 for Wal-Mart (WMT), 28 for Bed Bath & Beyond (BBBY), and 29 for Best Buy (BBY). How can this be? The sell-side is not shy about telling you that it’s because Sears doesn’t give guidance.

Without guidance, how can they possibly know how to project sales and earnings on a quarterly basis! It’s ludicrous, really. After all, a research analyst’s job is to research, analyze, and make projections. Heaven forbid should they actually be forced to do their job! So what we have on Wall Street are people who take numbers companies give out on conference calls and plug them into their own Excel spreadsheets. Not exactly quality due diligence.

But then we have the other end of the spectrum. It occurs a lot less frequently, but it does happen, as Wednesday’s trading action in Cigna (CI) stock shows. Cigna shares fell $15 after reporting first quarter earnings. What happened, you ask? They missed estimates, right? Nope, they reported EPS of $2.11 on $4.1 billion in revenue. Consensus estimates were $1.89 and $4.1 billion.

Oh, well then they lowered guidance for 2006, right? Wrong again. Cigna actually raised 2006 EPS guidance from $7.25-$7.70 to $7.50-$8.00 per share. Well then why on earth did the stock drop $15? Amazingly, it was because analysts had been projecting 2006 earnings of $8.07 per share (estimates ranged from $7.50 to $9.10). Why would the average Wall Street projection be for EPS of more than $8.00 when the company ‘s management thinks they are going to earn less than $7.50?

As stated before, I’m all for analysts doing extra work on their own outside of conference calls and press releases from companies. However, when a stock drops $15 after the company raises their guidance for the year, something isn’t right. Such a huge discrepancy between what management teams project and what analysts project should be a red flag. If the analysts are more accurate, then they are doing their job well, but such instances are rare. After all, CEO’s and CFO’s should certainly know more about their company than the analysts who cover them.

Now for the only really important question with respect to all of this: is Cigna a buy at $90 after the $15 drop?