Why the “Stubborn Persistence of Optimism” by Stock Analysts?

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Just before Valeant imploded as its iffy accounting procedures and business practices – buying drug makers or the rights to drugs protected by monopolistic structures then jacking up the price of these drugs – broke the surface, there were the Wall Street analysts.

They’re following the company. They’re experts on the company. They’re rating it and putting lofty price targets on its shares. It’s a quarterly routine. The Q&A portion of the earnings call on April 29, 2015 – before all heck broke loose and before the stock crashed 90% – depicts to what extent analysts are in bed with the company (transcript via Seeking Alpha):

Analyst with Canaccord Genuity:

“I’ve noticed that you’ve taken two 9% price increases in Q1. Does that mean that you’re feeling pretty good about where you stand with managed care…?”

Analyst with Guggenheim:

“Just on the gross margin reaching 80% by the end of 2015, could you give more color on what is going to be driving that?”

Analyst with BMO Capital Markets:

“Howard, congratulations on a strong track record with Valeant. You sounded very committed to the company last year, and we were under the impression that you were staying on for another two years. If you don’t mind us asking, what changed since mid-last year?”

“Howard” is Howard Schiller, CFO from 2011 until he resigned in 2015. Before that gig, he was COO of Goldman Sachs’ investment banking division. Valeant awarded him about $65 million in stock and securities. Then on January 6, 2016, when CEO Mike Pearson disappeared for health reasons, Schiller came back as interim CEO, with a salary of $400,000 a month! Investors weren’t so lucky.

Analyst with Barclays:

“And then in terms of the gross margins for Dendreon which you expect to get to 60% by year-end, is that sort of how we should think about that for 2016? Or as some of the other initiatives … take hold, could you start to inch up from that level or move up from that level? I think when you announced the acquisition you sort of indicated that you thought you could get considerably above that 60% level.”

Analyst with Piper Jaffray:

“So just on your comments on the expansion of the hospital sales organization and then greater promotion into the pain specialist market, should we take that to mean that you are now more open to acquisition activity in the hospital space or in the pain management space?”

Analyst with Susquehanna Financial Group:

“Could you talk a little bit about pricing on some of the products where it is a driver? I think it’s certainly a contributor in the neurology and generics segment. Does that continue to be a year-on-year driver through this year?”

Analyst with Morgan Stanley:

“Mike [CEO Mike Pearson], could you just update us on opportunities ahead to use stock for a large transaction and whether there might be any opportunities to buy large assets out of big pharma?”

“And then, Howard… what do you think investors on Wall Street most underappreciate about Valeant?”

Yup, he did ask that, hilariously, on the eve of Valeant’s implosion!

You get the drift. Rather than poking around to figure out what was really going on at Valeant, analysts, in between glorifying management, were just looking for decoration with which to hype the stock to their clients.

But last Wednesday, the day after Valeant shares had plunged 51% and were down nearly 90% from their peak last year, ten analysts finally cut their ratings or price targets.

According to Bloomberg, “only about 5% of the ratings on 1,778 US companies worth at least $1 billion are ‘sells’ or the equivalent.” For pharma stocks, it’s 2.5%.

Analysts’ median price targets for pharmaceutical companies are an average of about 53% higher than the actual stock prices even though shares of those companies have dropped almost a quarter since July 20. Only biotech stock-pickers had rosier outlooks, with consensus targets 68% above current prices.

But why “the stubborn persistence of optimism?” As Bloomberg put it, “Two things: saving face and access.”

After bamboozling clients into buying a stock, analysts have trouble telling these same clients that it was all based on hype, and that now it was time to unload this crap at a loss. They also have trouble downgrading the company because it could further eat into their clients’ portfolios. So price targets get moved higher, even at the end of the seven-year bull market, and even for companies like Valeant, weighed down by a mountain of debt, a dubious business model, and problematic accounting.

What analysts want, among other things, is access. Bloomberg:

Upbeat guidance can mean golf and soirees with company executives, hosting them at investor conferences and being picked first to ask a question on quarterly conference calls.

Then there’s the flip side. A neutral or negative recommendation can get an angry phone call from the C-suite, said Kennen MacKay, a biotech analyst at Credit Suisse Securities in New York.

“If you have a positive rating and wrong assumption, you might not hear about it from management,” MacKay said. “If you have an underperform, the management will attack every assumption you have.”

And then there are the investment-banking divisions of the firms where the analysts work. Investment bankers want these companies as clients, and they pressure analysts to butter up corporate executives – or at least not screw up the relationship. These folks want to be in on the next bond issue, merger, acquisition, or spin-off to extract their fees and fatten up their bonuses.

Officially, inflating ratings and price targets to the detriment of investors in order to get profit opportunities from those companies violates securities law. But hey, a slap on the wrist every now and then is well worth the extra billions in fees and millions in bonuses over time. And investors who believed those analysts and took their recommendations and price targets seriously and lost their shirts, well, to heck with them.

Now we’re getting reports that prices of the most expensive homes in the Hamptons, where Wall Street’s richest hobnob over the summer, are getting crushed. What’s getting blamed? Read…  Super-Luxury Homes Hit by Reversing “Wealth Effect”

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  33 comments for “Why the “Stubborn Persistence of Optimism” by Stock Analysts?

  1. Arne
    March 20, 2016 at 5:02 pm

    Reading and listening to quarterly calls, it’s remarkable how rarely an analyst will ask an adversarial question or challenge an executive’s assertion. Most of them do nothing but make humble requests or submit obsequious praise: “can you,” “could you,” “appreciate the color,” “congrats on a great quarter,” etc. These guys aren’t advocates for shareholders or bondholders.

  2. Merlin
    March 20, 2016 at 5:50 pm

    Just another data point showing how rigged is the game against the individual investor.

  3. Dan Romig
    March 20, 2016 at 6:01 pm

    As I posted to Wolf’s 2 November 2015 ‘How Wall-Street Financial Engineering Vaporized Valeant’ by David Stockman’s ‘Contra Corner’:

    “My question is why does VRX still have any market cap at all?”

    A 90% stock crash answers my question.

    I do own a bit of Biogen, and its been a rough ride so far, but they are, I think anyway, a real company. Howard Schiller is a scam artist in my opinion.

    • Dave
      March 20, 2016 at 6:12 pm

      Dan, why do you think they call him “Shill” er?


  4. Dave
    March 20, 2016 at 6:11 pm

    Why doesn’t everybody take their money and go home. Let Wall Street, Banks and Big companies play with other until they climax and explode?

    • ERG
      March 21, 2016 at 6:49 am

      They have.

      They will.

      The problem is they have a pipeline to our wallets when they screw up, hence they have no reason to ever stop screwing up.

  5. LG
    March 20, 2016 at 7:02 pm

    Unbelievable! We all live in a con!
    Born in a con live as in then die in it!

    • DanR
      March 20, 2016 at 7:28 pm

      While I am not currently practicing religion much, I mull over the Christian concepts of the “fallen world” and “man’s sinful nature” as I read financial news.

  6. NotSoSure
    March 20, 2016 at 8:06 pm

    At this point, the analysts can’t be blamed. What’s weird is these so called “clients” happily being taken into the cleaners again and AGAIN. Who are these muppets?

    • Álvaro
      March 21, 2016 at 5:53 am

      What clients? It’s all about buybacks.

      • March 21, 2016 at 8:29 am

        Perfect timing of your comment! See my new article on buybacks.

    • MC
      March 21, 2016 at 6:48 am

      Call them “retail investors”, “dumb money”, “the greater fools” or, far less gently, “lambs being led to slaughter”.

      One thing I’ve learned over the years is when a financial product starts being publicly hyped, it’s more or less over for it.
      The big gains on it are invariably gone and the “smart money” needs to dump that asset, preferably at a profit, upon somebody else. Once the “smart money” has moved out, that given asset can perhaps inch forward but will never give the returns the “dumb money” hoped for.
      And this is if everything goes according to plans: see the infamous Argentinian sovereign bonds scandal.

      Even if no foul play is involved, just look at Microsoft and Cisco Systems: their stocks are now worth a fraction of what they were worth in 2000 despite both companies being in excellent financial health. I still remember the “buy now” cries in 2000, as the smart money was dumping MS and Cisco stocks at all time highs upon retail investors eager to make the deal of the century. They ended up being slaughtered when the Dotcom Bubble popped.

      If we want to look at more recent time and at a subject often covered on Wolf Street, let’s look at Abengoa (ABG). In January 2014 its stocks went parabolic, doubling in value in less than three months. As the peak was nearing, it became the next to buy stock, with analysts hinting it was on its way back to its 2007 peaks. Even by buying at those values, it was a guaranteed 60% return.
      As stocks flowed from the smart money to the dumb one, ABG lost all its 2014 gains, and some. The lambs were slaughtered without mercy, and were slaughtered once again for good measure during the now infamous early 2015 ABG dead cat bounce, based around the rumor the Spanish government would step in and bail out ABG.

      There are two kinds of analysts: the former is made up of those working for the “smart money”. They rarely, if ever, appear in public and when they do they limit themselves to broad analysis.
      The former is made up of analysts whose job is to “shill” whatever the smart money needs to dump at the moment by using their credentials as “insiders”.

  7. jest
    March 20, 2016 at 8:48 pm

    Thanks for the Wolf to keep us informed!!

  8. David
    March 20, 2016 at 9:22 pm

    This is no revelation is it. I think most investors are wise to how phony & unbelievable all of this so called “analyst” stuff is. It never was and never will be real just like the rest of the scam game.

    • Dave
      March 21, 2016 at 10:33 am

      David, “This is no revelation is it. I think most investors are wise to how phony & unbelievable all of this so called “analyst” stuff is.” Many, many people go to their financial advisor to have their money invested. If you buy ETFs and Mutual Funds, you are buying many of these companies/stocks that we discuss. The Financial advisors buy whatever they are advised to buy based on YOUR risk tolerance. So even if you don’t believe the analysts, or don’t like certain stocks or hate the stock market, many people believe it’s the only way to generate some return above ZERO.

      The market has stayed up for 7 years now with NO crash. Crashes are rare but they are painful. So what you gonna do?

    • Cameron888
      March 21, 2016 at 10:25 pm

      Yes David you are correct. Old news. No revelations here and it is certainly not an issue which is new to the author either.

      The stock research/analyst industry was exposed many years ago for what it was and what it was doing and you would have to be asleep to have missed it. There are many articles and also entire books written on the subject and chapters in other finance books which you will find in the barely touched section of your large book store where you will usually find no one else shopping called “Business and Finance”.

      These analysts are essentially producing for the retail end of the market and those engaged in selling to that end. Usually the muppets are too lazy or too stupid to do any investing work themselves. Typically they always like to blame someone else when they lose money. Serious small traders do their own research as do large traders and fund managers. If they want to check something they go straight to the companies concerned.

      It is true that analysts normally don’t like to upset companies they report about with negative comments(for many reasons) and typically(with few exceptions) you will not see a negative rating from these people on a company until its stock has already bottomed on some very bad development.

      Some of these people send their reports to the companies for comment before they release them to clients and other parties.. I have had them across my desk multiple times.

      IMHO, if you trade stocks primarily based on analyst reports and recommendations you would be foolish. But each to his own.

  9. Michael Gorback
    March 20, 2016 at 9:48 pm

    “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” — Upton Sinclair

  10. night-train
    March 21, 2016 at 4:30 am

    Greed, lust for power and the willingness to completely prostitute oneself are not bugs in the system; they are a feature. Temptation is tempting and too many do not have the grounding and moral fortitude to “Just Say No.” That is why we need strong regulatory oversight and penalties that reflect the seriousness of the damage to society. Sure, I know it isn’t a perfect solution, but we have too long let the imperfect be the enemy of good.

    • TheDona
      March 21, 2016 at 10:10 am

      We are just faceless, replaceable serfs toiling in the fields while the incestuous marriage of the Government to Wall Street has produced the Largest Royal Court in the World. Why would someone in the Royal Court risk becoming a pariah and made to work in the fields?

  11. d
    March 21, 2016 at 5:37 am

    “And then there are the investment-banking divisions of the firms where the analysts work.”

    No matter how great the chinese walls.

    When the words of the right hand, effect the profit made by the left one. The right one will say, what the left one needs said. Without fail.

    Just like CNBC and all the other market sites, they sell advertising, so they say/write, what gets view’s/clicks, 99% of the time.

    Just like Dent’s articles here,the vast majority of what they present is history, by the time you read/see it.

    If you need to use an annalist, find an independent one, without an undeclared, agenda, or bias, then you may possibly have an impartial one.

  12. Chris
    March 21, 2016 at 7:17 am

    Just amazes me how profitable fraud has become on Wall Street.

  13. March 21, 2016 at 8:32 am

    … and nobody will be prosecuted.

  14. roddy6667
    March 21, 2016 at 9:17 am

    I was a Realtor in February 1988 in CT when it was pointed out to me that the positive metrics had all stopped and had reversed. Resales of homes, total sales, average sales price, and most important of all, average Days On Market (DOM), had all reversed. It started in the Greenwich area, where the boom had started. Being a Realtor in an affluent town (Avon) and a complete cheerleader for the industry and the whole concept of home ownership, I didn’t want to see it. I remember making statements like “It’s a glitch”, an “anomaly”, and “it will turn around next month”.
    I was 100% wrong. Prices in CT dropped 50% in some areas. It took a decade to regain the early 1988 level. I lost my home (I got very upside down in my mortgage) and my job. I found it hard to sell houses when they became a depreciating asset like cars or VCR’s.

    “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
    Upton Sinclair

  15. Paulo
    March 21, 2016 at 9:27 am

    I didn’t see any fawning from Jim Cramer in this article? Sickening.

    And then we have Bain capital; those who buy cheap, strip assets, load up debt, fire the employees, show improving numbers (hah hah) and sell again. If you do it well you might be asked to run for President!! You might even be called a ‘good man’.

    Time for a cataclysmic wake up. Time for a reset. Time to go home.

  16. TheDona
    March 21, 2016 at 9:53 am

    Dear Readers: PLEASE watch The Big Short and make sure to read all the comments at the end of the movie. The movie explains in detail (using layman’s examples about Vegas or the game of Jinga) how much of a rigged gambling game Wall Street is and why it continues. Nothing has changed since the 2008 meltdown. For us wage slaves, it appears wiser to not put any money in your 401k….take the tax hit…pay down all of your debt and then bury YOUR money in the backyard. Otherwise we are just handing over free money for these sociopaths to play with.

  17. alexaisback
    March 21, 2016 at 10:45 am



    I understand and hope for correction if wrong VALEANT WAS SELLING DRUGS IN STATES LIKE CA

    ” Where was Isolani’s pharmacy permit? That they obtain their own, and not rely on R&O’s was a core component of the sale agreement. (It does not appear they ever applied for one.)

    To Reitz, the huge volume of Philidor’s prescription drug sales, using R&O’s National Council for Prescription Drug Programs number, was infuriating; that a good deal of the millions of dollars in volume were in states where R&O had no registration to operate in, with drugs he never had dispensed, and filled by a pharmacy he did not own, was nauseating. To pile insult upon injury, he had refused to sign the pharmacy’s audit only to learn it was signed by Eric Rice. ”

    The lawsuit spells it out.



    so Insurers would not see the Valeant Phildor name on an order, and therefore deny insurance purchase, Valeant with Philidor bought smaller pharmacies and operated under many names

    Philidor of course I understand often or on occasion changing prescriptions to avoid fill by a generic

    Additionally to avoid filing/Licensing requirements in CA and other States – Valeant Philidor illegally/improperly used the small pharmacies licenses ( which I understand is illegal if the true owner is not named on the license ).

    ACCORDINGLY in my opinion Valeant will further suffer declining revenue as these false or fraudulent practices come to light

    and Ackman does not understand it and will be left holding a bigger bag shortly. Ackman is a fool.
    . As my best guess Watch as CA will IMHO file a legal suit against Valeant for licensing fraud, well just my opinion and prediction on what shall occur. Your guess opinion is as good as mine.

    • Al B
      March 21, 2016 at 5:29 pm

      They’re not called “sell-side” analysts for nothing, you know. If a 25-year old liberal arts major (me) could trot executives around to analysts and convince them them to tout er, recommend, the stock, you know something is very, very wrong.

  18. nick kelly
    March 21, 2016 at 7:43 pm

    Here’s another thought on this whole thing- maybe big pharma ate the recovery.
    I am still grappling with the mind- boggling stat courtesy of Wolf Street that drugs are 12 % of wholesale sales of EVERYTHING. I queried this thinking it was unbelievable but was assured by M.Richter that it is true.
    Add the fact that drug prices are up 100% since 2011 and you may find the missing 2-3 or even 4 % of a recovery that should be much stronger.
    Pharma ate it.
    Of course this industry was automated at the production level decades ago so there would be minimal if any new hires. There is minimal multiplier effect from a drug purchase.
    But a huge removal of consumer purchasing power.

    Just a thought.

    • Dan Romig
      March 21, 2016 at 8:51 pm

      Nick, I agree regarding drug prices, but why?:


      I hope the web link is correct. 40% or so of the way in there’s a mention of Louisiana Congressman Billy Tauzin and Medicare Part D that explains some of the drug price run ups.

    • MC
      March 22, 2016 at 2:49 am

      Drugs are parts of the four pronged assault on the ordinary consumer/saver. In the specific they are part of the “unreported inflation” component, that curious phenomenon that hits everybody buying drugs or food mere hours after being sternly lectured about the risks of “deflation”.
      The other three components are in no particular order: stagnating or, more often, declining real wages, increased taxation (often under the guise of “junk fees” and similar accounting tricks to squeeze more blood out of the beets) and the war on savings.

      I did some back of the envelope math and found here in Europe food prices have increased 35% since 2007, consistent with the “real world inflation” of 5-6% I’ve heard many mention. The 2009 deflation was briefly lived and quickly reversed.
      Add that on top of your 100% increase in drug prices and your reasoning about the removal of consumer purchasing power starts making even more sense.
      To this you may add fuel prices right now are higher than they were in 2008, when crude oil was almost thrice as much as it is today, even after that forced rally that will soon fizzle out.

      Technically all of this would be great news for nominal GDP figures, but the fly in the ointment is wages are not even remotely keeping up with that “inexistent” inflation so consumers have to make choices: they buy drugs and reduce their purchases everywhere else.
      That’s called parceling out growth, one of the hallmarks of a command economy.

  19. Newbie
    March 22, 2016 at 11:46 am

    Hey Wolf, Newbie here again. I’m totally on board with you about the analysts. And you can rejoice that I remember you having posted that opinion before. But, why do mutual fund firms, like Sequoia, who have their own set of analysts and have minimum diversification in their portfolio and have an excellent track record of their own analysis, not see through the BS? Sequoia’s performance is obviously being heavily hit by the high percentage of Valeant in their holdings.

    • March 22, 2016 at 1:13 pm

      Yes, great question. This is the phenomenon we’ve come to call “consensual hallucination.”

      Here is one piece on it:

      If you search on Wolf Street for consensual hallucination (search box in right column below list of videos), you’ll find a number of pieces on it going back a couple of years. Have fun!

      • newbie
        March 22, 2016 at 4:38 pm

        Thanks for the advice. I did my search as you suggested. Good education, Wolf. But the whole situation now becomes worse than I thought. My takeaway is: once a mutual fund realizes it is participating in “consensual hallucination” (i.e., “following the hullicinated crowd”), then if that funds remains invested in that particular investment, the investment becomes purely a gamble in hallucination momentum with the fund having an overall strategy of hoping to eventually rush out the door before everyone else does. In other words, the fund is willing to invest in a falling knife. Believe I’ll dump the fund! Thanks for your multiple responses.

Comments are closed.