Hard Look / Wanted: Abject Coward for Investment Bank

From the start of 2007, the diligent sell-side analytical community at Israel's investment banks and brokerages have published more than 350 recommendations regarding stocks, according to figures collated by TheMarker Finance. It cannot be said that their reports are marked by lion-like courage.

By the way, the difference between sell-side analysts and buy-side analysts is chasmic. Sell-side analysts work for brokerages that sell securities: theoretically they have a vested interest (on behalf of their company) in plugging the share, though they're supposed to be perfectly objective - hence the phrase "Chinese walls" between the analysts and the brokers at the investment banks. Buy-side analysts work for the mutual funds and other institutional investors that buy the securities and their interest is to get it right.

With that clear, it may now be equally clear why the sell-side analysts produced so few recommendations to sell the stocks they cover. You could count their Sell recommendations on one hand. Literally. Out of the 350-plus papers on shares written in 2007, only five counseled investors to dump the share.

Nor was the picture more encouraging in previous years, which only goes to show that if you're looking for investments, don't ask them. Israel's analytical community doesn't have the answers you need.

It proved almost impossible to get analysts to cooperate with TheMarker TV, or write for TheMarker's column "Shares to Buy, Shares to Sell." The results of our search were worrying.

In general, analysts love media coverage, but in this case they evidently preferred to forgo the spotlight rather than say anything negative about the companies they cover. Many evaded our requests with this or that degree of elegance, but one baldly stated, "I prefer not to publish Sell recommendations for companies, because I'm afraid of the reaction of their controlling shareholders and managers."

The somewhat-more courageous brought themselves to delicately imply, after heaping superlatives on the management, that "the company is fully priced." Which is a euphemism for, there's no earthly reason at this point for the share price to rise, other than random market fluctuations.

The blind-dating scene comes to mind. A fat slob turns into "strongly built," a divorcee with five kids turns into an "experienced family man." Analysts use similar sleights of the pen. Instead of candidly writing something like "The company's business holds no attraction and its growth engines have been driven into the ground," they'll write something like, "We admire the controlling shareholders for having had the good sense to lead the company to its present status, and had the even better sense to come out of crises all the stronger." Oh, and don't forget, "The company has reached an appropriate share price level and is fully priced."

Some opt for the carrot and the stick. They warmly recommend investing in some company belonging to one of Israel's richest business moguls, who owns several dozen companies, and delicately suggest that investors should sell their holdings in some other company that person owns, a very small one.

You might argue that the analysts aren't to blame: the year 2007 was a terrific one for Israel's capital market. Perhaps, you say, the recommendations were almost uniformly rosy because that was the reality. But the facts don't support that thesis.

A quarter of the companies listed on the Tel Aviv-100 index have lost ground since the year 2007 began, and some of them are shares that no analyst would dare to recommend dumping. For instance: the real estate giant Gazit Globe, Bank Mizrahi-Tefahot, mammoth Blue Square Properties, or Yitzhak Tshuva's real estate subsidiary Delek Real Estate, though there are many more. These are not shares that are lightly dismissed by the equity analysts.

A third of the companies on the Tel Aviv-100 index retreated during the third quarter, such as Alvarion and Arazim. News flash for Israel's analysts: share prices can drop, too.

Why are the analysts such a lily-livered lot? Maybe they're afraid that if they write candid analyses with negative bottom lines, they'll have trouble when seeking work outside the capital market? Could they fear that an angered management won't meet with them any more, and will confide its secrets in a rival analyst? It's hard to say. But it seems that when investment banks seek analytical talent, they aren't only looking for economic credentials and a willingness to work hard. They also want to make sure he or she comes unencumbered by a spine.