Why They All Got The BP Call Wrong

Why did dozens of analysts get the BP call wrong?  Because they are “Fundamental” analysts.  Yeah, I pulled the pin out of this grenade, so let’s at least enjoy the explosion…

Reuters is out with a “Special Report” on why all the analysts got the BP call wrong.  Almost every major firm had a buy rec on BP before the crisis and then rushed in to defend it a week or so later.  The stock puked up half its value ultimately, embarrassing all the sell-siders and TV touts who just couldn’t resist making the premature buy call:

Yet, nearly to a person, the dozens of securities analysts who followed the British oil giant were unfazed. As BP shares continued to drop, most were screaming the same message: buy, baby, buy.

So how is it possible that they all messed up?  The Reuters article mainly blames it on the banking relationships that force analysts to remain on the sunny side.  I think this misses the mark – so below I’ll keep it real on why they all got BP wrong:

Because 99% of them are fundamental analysts.  They almost can’t make anyone money even without an environmental catastrophe affecting a name they cover.

Fundamental analysts on The Street all went to one of the same 15 schools to learn securities analysis.  For some strange reason, they’ve been indoctrinated with this belief that Discounted Cash Flow analysis and terms like “Fair Value” will mean anything at all in a market of buyers and sellers relentlessly seeking advantage over each other.

DCF is the tooth fairy, Fair Value is Santa Claus.

Rather than utilizing real-time data about buyers versus sellers in a particular issue, fundamental analysts concern themselves primarily with extrapolating the statements of perpetually lying executives and the endlessly manipulated earnings statements of the subject company.

Backward-looking results and metrics along with “color” from the latest conference appearance take the place of statistical realities on the ground and in The Tape.  That’s why fundamental analysts can’t make you money consistently – because they are analyzing companies and not the stocks themselves.  Oh, and they love “stories”.  Just like my daughter at bedtime.  It’s not their fault, their clients like stories, too.  Can’t call up the portfolio manager at a pension fund and say the stock is going higher because it’s going higher, he’s got to know the reason.

Fundamental analysts don’t even pretend that they exist to make anyone money in stocks anymore.  Look at the ratings they place on stocks these days, they’re absolutely incomprehensible!  Overweight, underweight, accumulate, hold, focus list, attractive…seriously, attractive?  Overweight?  Thanks for that.

So now you take a scenario like BP where, in truth, no one has any clue what the damage could be, how much the disaster may cost, who is on the hook for the cleanup, etc.  It’s all unprecedented.  For a fundamental analyst to step up in the midst of all the uncertainty and pretend like their “models” have an answer is the height of slapstick-comedy-masquerading-as-research.

You want to come out and say “buy some but there is probably more risk,” that’s fine.  It’s OK to admit that you aren’t sure.  You want to come out and say, “look, there’s no way of knowing, but I’d take a shot here,” that’s cool, too – at least you’re being honest.

But to come out with a 9 page fundamental analysis of a situation like BP and to further give people the advice to jump in, as though you’ve visited the future and know when the leak will be contained and what the final bills are?

Clowns.

Stick to analyzing companies, leave the stocks themselves to the guys with the risk.