Chad Brand of Peridot Capital Management LLC discusses Meredith Whitney.
Sorry Fortune, Meredith Whitney Is Just An Average Analyst (You Even Said It Yourself!)
Remember when Henry Blodget made his $400 call on Amazon stock back in the late 1990’s? He will be known forever for that call more than all the other ones he made combined. Fast forward nearly a decade and Oppenheimer banking analyst Meredith Whitney has achieved similar rock star status. The August 18th issue of Fortune Magazine has her on the cover.
Now, I like Fortune a lot. In fact, aside from an online subscription to the Wall Street Journal, my subscription to Fortune is the only periodical I actually pay for. But this Meredith Whitney hoopla is really getting old, and quite frankly, it’s too much.
Like Blodget, whose $400 price target came to fruition despite the controversy surrounding it, Whitney’s early warning on Citigroup (C) stock last year definitely deserves kudos. She got death threats after suggesting the banking giant would be forced to cut their dividend and raise capital. At the time it was a minority opinion, but she was right and deserves credit for a very bold and correct call.
That said, let’s not get carried away. Investors and the media should not judge an analyst on a single call, but rather the entirety of their work. There are great analysts out there, but the track records of most are mediocre at best. When I have the chance to guest lecture undergraduate and MBA students, I often refer to a study that showed the stock picks of sell-side analysts, like Whitney, consistently underperform the market and do so with more volatility.
So, does Meredith Whitney deserve all the attention she has been getting lately from investors and the media (she is on CNBC all the time)? I have nothing against her, but I doubt it. She should be commended for the Citigroup call, but treating her as the "go-to" analyst on banks would only be reasonable if her track record beyond that one call was overly impressive. Unfortunately for investors, it isn’t.
In the Fortune cover story, in fact, it is mentioned that according to Starmine (a company that tracks the performance of analyst recommendations against their industry peers), Whitney’s stock picking ranked 1,205th out of 1,919 analysts in 2007 (the year of the Citi call). During the first half of 2008, Whitney’s picks ranked 919th out of 1,917 analysts.
The only conclusion I can draw from those numbers is that Whitney is no better than an average bank analyst. In the world of sell-side research, "average" is hardly something to get excited about.
Does this mean you should completely ignore what Whitney and other analysts say? No. They put in long hours and often can provide a lot of information that is helpful in conducting stock research. Still, we should not drop everything and hang on every word whenever Whitney is on CNBC or lands on the cover story of a magazine. She just isn’t going to make us rich.
Need proof? Consider her recent downgrade of Wachovia (WB). Whitney downgraded the stock on July 15th from "market perform" to "underperform." For those who prefer to translate Wall Street lingo, that means she went from a "hold" to a "sell." Good call? Umm, hardly.
Wachovia stock actually bottomed that same day at $7.80 and closed at $9.08 per share. It never traded lower than that, completely reversed course, and traded as high as $19.48 on August 1st. That is a gain of 150%, peak to trough, in just 13 trading sessions! Just imagine if you shorted Wachovia because Whitney put a sell on it!
Just as we should not judge Whitney solely on her Citigroup call, we also should not judge her solely on the terrible Wachovia downgrade. Still, since her stock picks rank her as an "average" analyst within a mediocre group of stock pickers, I can safely say the attention she is getting these days is a little over the top.
I still love Fortune and CNBC and all the other outlets going gaga over Meredith Whitney. I just think she’s pretty overrated and want people to understand the facts along with the hype. People just love a good story on Wall Street and right now, she’s it.
Full Disclosure: No position in Citigroup or Wachovia, long a subscription to Fortune at the time of writing
