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Wall Street Cheats - Here's How They Do It

June 29, 2014 | About:

Wall Street ‘Cheats’. Here’s how...

Los Angeles based Wedbush Securities got some national press last Friday morning when Barrons.com republished their Jun. 26, 2014, research blurb on Bed, Bath & Beyond (BBBY). The analyst indicated he was now 'Neutral' on BBBY @ $61.11 per share. He cut his target price by $8 per share to $58.

The client research alert was accompanied by a BBBY chart dated June 26, 2014 @ 4:00 PM.

What was not said was that BBBY had reported after the close on the previous day. The stock was already trading in the $56 range as the analyst was writing to clients.

Barron’s on-line editor was complicit in publishing the Wedbush piece without fact-checking to see that it could not have been accurate at the time of its release.

How can I be sure that the Wedbush analyst knew about both the Q1 news and BBBY’s share price reaction? He discussed the quarterly report in his research alert (see excerpt below).

Pretending to have downgraded the stock before its $5 per share drop is not ethical. Counting his firm’s change in rating from a closing price that was no longer available inflates their model portfolio results in a way that customers know does not reflect reality.

Here is what took place in the shares of Bed, Bath & Beyond after the close on Wednesday but prior to Thursday’s opening. Note the impossibility of trading at $61.11 after 4 PM on June 25, 2014.

Past-posting is not a new concept. It was the main theme of The Sting, Hollywood’s Best Picture of 1973.

Now let’s look at the quality of advice Wedbush was offering, ignoring the fact that they failed to address events that had already taken place.

The analyst went to a Neutral, supposedly at $61.11 with a price target of $58. Is there anyone reading this that would like to hold a non-dividend paying stock that you believe will be about 5% lower in the foreseeable future? Just asking.

Was that $58 goal price really a good evaluation of where BBBY could be a year? The buzz on the Street was that BBBY had ‘missed’ its quarter. In fact, the 93-cents was right within management’s previous guidance range of $0.92 - $0.96. It exactly matched the year ago fiscal Q1 EPS in a period that spanned a (-2.9%) GDP and the much ballyhooed Polar Vortex.

I found that pretty impressive.

After digesting the ‘disappointing’ numbers here are the latest earnings estimates from up to 28 different analysts as reported on Yahoo Finance.

The consensus views for this year and next are both higher than ever before. That is true even if you go with the lowest numbers from any of the more than two dozen opinions.

What is the normal valuation for a company like BBBY? Check out how the stock actually traded over the past three years.

At the two best recent buying opportunities BBBY was selling for 12.8x and 11.9x the current FY’s earnings. Those who sold in despair, because they suddenly realized the company was facing competition from Amazon, missed chances at 46% and 47% gains that came within 12 to 18 months. Momentum-oriented traders paid 16.7x and 16.9x to buy the same shares they had shunned at much lower valuations.

At the June 26, 2014, intra-day low of $54.96 BBBY was available at 11.0x the newly lowered expectation for this year. An eventual rebound to a 16 multiple on the forward estimate would support a move back to about $80.

Is that crazy to imagine? Not if you realize that BBBY’s 2013 peak was $80.50 and this year’s pinnacle was $80.82.

Ignore last week’s absurd nadir and the following chart shows the classic cyclical pattern that had been in place since 2007.

Bed, Bath & Beyond has not been this cheap since its absolute bottom in the dark days of 2008. The previous four peaks came at valuations of P/Es of 16.6x and above. History suggests we will get a chance to sell at that level again.

This debt-free company offers much to like and little to fear from today’s quote. BBBY is now a contrarian’s dream.

Ignore the hype that ‘everybody’ is selling. Somebody smart is on the other side of all those panic sales. It’s not too late to join the party.

Disclosure: Long BBBY shares, short BBBY puts

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.7/5 (12 votes)

Voters:

Comments

rdj1234
Rdj1234 - 3 weeks ago

This is why I always read your columns.

Thank you

Roger

P. S. Another way Wall St. cheats is the way S&P reports the S&P 500 results. They don't include Dividends in the index results, but EVERY mutual fund DOES include dividends in their results. It kinda hides the funds poor results a little bit.

LwC
LwC - 3 weeks ago

AFAIK the stock quote and the date of the stock quote shown in parentheses in Barron's Hot Research are added by Barron's; they are not part of the analysts' report.

If you had done some more research, you would have learned that the Wedbush report on BBY was issued on June 26, at 7:04 AM EDT, a couple of hours before the market opened.

You wrote: "They [Wedbush] claimed changing their opinion as of the [June 25] 4PM closing quote of $61.11." Well, considering that Wedbush issued their report at 5:04 AM local time the next morning, it's clear that the analyst was responding to the previous evening earnings report (as is noted in the report) and that he could not have known that the market would open 2 1/2 hours later at $56.50. On their website Barron's notes about Hot Research reports that "Share prices at the time the report was issued and the date of the report are in parentheses." Since the report was issued on the 26th before the market opened, it is consistent with Barron's practice that the BBBY Hot Research report accurately stated that at the time the Wedbush report was issued, the last traded market price of the shares was $6.11 and that the date of the report was June 26.

Also, while Wedbush reduced their price target in the report, they did not downgrade BBBY's rating; they reiterated their neutral rating. Yet you assert that they "downgraded the stock." How could you have gotten that wrong?

IMO it's ironic that you accuse the Barron's on-line editor of not fact-checking, while it's you who in fact may be guilty of not fact-checking. As for your insinuation that Barron's and/or Wedbush were "Intentionally Deceptive? You make the call", maybe it's you who are being "Intentionally Deceptive." The readers can make the call.

Dr. Paul Price
Dr. Paul Price premium member - 3 weeks ago

BBBY instantly went to $56 - $57 in aftermarket trading just after 4 PM on June 25th. The Wedbush analyst had already seen that action when he boldly claimed to downgrade the stock at $61.11, a price that was clearly no longer available to anyone looking to sell.

If you are unaware that after hours trading is indicative of where the shares will open the next day then you should not be commenting. While the official close was above $61 the analyst had seen that the 'live' price was under $57.

Barron's certainly was aware of that fact. They had reported the AH plunge on Barrons.com on June 25th.

The pre-market indictaion showed the large drop also. I was able to buy BBBY at $55.44 before the opening bell. The Wedbush analyst would have been well aware of the true price at the time he wrote his report. The $61+ 'last trade' was intentional weaseling.

LwC
LwC - 3 weeks ago

"If you are unaware that after hours trading is indicative of where the shares will open the next day then you should not be commenting."

LOL. I've certainly seen after hours trading prices go higher and/or lower than the closing price, and then open the next day at about the previous closing price, and I've seen that happen often. Presumably you have too, so IMO your retort is ridiculous and "weasling".

The Wedbush analyst didn't mention the $61.11 closing price in his alert. As I've pointed out, Barron's added that information (apparently you are still confused about that). AFAIK you have absolutely no evidence that Wedbush and the Barron's Hot Research editor were acting in collusion for some nefarious purpose. IMO your unsubstantiated accusations reveal more about you than about Wedbush and Barron's motivations.

So what if the analyst knew of the after hours trading price. After all that information is available to anyone who wants it. Neither the Wedbush analyst nor you could have known what the June 26 opening price would be when the analyst published his alert, regardless of what the after or pre market trading was. Your assertion otherwise doesn't change that reality.

As you almost certainly know, Barron's published stock quotes (and most other publishers' quotes) are "intraday", meaning they don't incorporate after or pre market trades in their quotes, so their use of the $6.11 previous day closing price was the latest price in intraday trading and is consistent with their practice.

And you've ignored my assertion that you erroneously accused the analyst of downgraded his rating for the stock. In fact, you've left that mistake in your article. By not correcting your mistake, are you being Intentionally Deceptive?

To paraphrase Dr. Paul Price in another thread:

"You violate all the good rules of journalism by not checking your facts before you publish and then not acknowledging and correcting your mistakes in your articles."

Dr. Paul Price
Dr. Paul Price premium member - 3 weeks ago

LwC,

I eagerly await your very first actual contribution to GuruFocus.

I'm sure you have lots of good articles to share. Why not submit some of your wondrous knowledge for others to learn from?

pravchaw
Pravchaw premium member - 3 weeks ago

I'd say its a bit suspicious that the analyst publishes a report downgrading the stock around the same time as an earnings release. I am with Paul Price here and think the analyst is trying to pump up his record.

I agree that this is a strong buy now - great cash returns on no long term debt.

LwC
LwC - 2 weeks ago

Price, it may be that the one and only contribution that I've made was when I pointed out the flaws in your analysis of the Williams Coal Seam Trust. Remember that one? You know: "Income You Can Believe In … Williams Coal Seam Gas Royalty Trust".

That's when you wrote: "Unless you are looking for a total collapse in natural gas pricing WTU units seem to offer the perfect blend of high income, extraordinary upside and low risk." Shortly thereafter the Trust suspended their distributions, and about a year later it sold its assets and went out of business. Of course you never came back with an explanation for what went wrong with your "analysis" and as usual you failed to acknowledge your mistake.

I especially like this quote from one of your comments in that thread: "The 4PM NYSE close on WTU for March 4th was $4.05 any other figure was from after hours trading and is not a reliable source for true data. "

So apparently your opinion about the reliability of after hours trading data is "fluid". Or maybe "self serving" would be more accurate.

And FWIW unlike you I don't feel compelled to publish in order to drive traffic to your websites.

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