Note: this post was originally published here.
Before I run into trouble let me state a little disclaimer: I do not a problem with any one analyst but rather the system as a whole.
On January 28, Monday, Jefferies analyst went on CNBC and claimed that StockBox Pick Aegean Marine Petroleum (ANW) as their top pick for 2008. On the news, Aegean rose 6.63 percent on the news. This is third time that a Jefferies analyst has caused wild fluctuations in Aegean’s share price. The first time occurred when a Jefferies analyst placed a price target on Aegean at $42 a share (Jefferies then raised his target $55). This buy rating plus a lot of positive coverage shot Aegean’s share price up as high as $48!
After Aegean made its dramatic run, the company announced a second equity offering in which the founder and one other director sold some of their shares. This equity offering was not actually share dilution since the shares were already outstanding. The additional offering sent Aegean’s share price tumbling 18 percent in one day. And guess who was a part of the underwriting team? That’s right, Jefferies. From the all time high of $48, shares dropped although below $30 and that’s the level that they are hovering at right now.
There have been some fundamental changes at Aegean such as the purchase of Bunkers of Sea (which gave Aegean a station in the English Channel) and set up its station in West Africa. These were important changes at the company, but not nearly significant enough to create the large price fluctuations that resulted.
I know that Jefferies is a profit-maximizing firm and even though there actions with regard to Aegean were dubious, they did help the firm achieve their end goal. Every investor must come to the realization that analysts and firms are not giving buy and sell recommendations out of the goodness of their hearts and they may have various motives, some of which may not coincide with those of investors or shareholders. This notion rarely carries weight in markets as analysts’ buy and sell recommendations drive stock prices in all sorts of directions despite the fact that professionals fail to beat the market 75 percent of the time. There have been various times in the recent history where the analysts’ performance was downright poor.
In the late 1990s analysts failed to place sell recommendations on various technology stocks as their valuations soared to astronomical levels. Analysts failed again as the tech crash unfolded and corporate scandals became commonplace in American markets. The analysts were the closest people to these corrupt firms who were not direct employees of the company. Despite their responsibilities, certain analysts just digested whatever numbers were given them and billions were lost in the Enrons of the world. Most recently, the various bond rating agencies (mostly Standard & Poor’s and Moody’s, but there were others) failed to the markets when they gave top ratings to mortgage backed securities that were anything but stable. In fact these rating agencies even failed (up to this writing) to take responsibility for their missteps citing “information quality” concerns.
Given the recent events, it is clear that analysts are not necessarily more apt to judge the future performance of various investments, even though they are better positioned to do so. Whether this result is due to profit motives or just plain incompetence, I am not sure. I do believe that there are many great analysts out there doing good work for everyday investors, but the performance of the industry as a whole is definitely drowning their results.
Back to Aegean
Despite all the hoopla created by Aegean’s fickle stock price, the company remains fundamentally sound. The company’s competitive advantage remains in tacked with the performance of its service stations and the fact that the order book for new tankers is locked up for the next several years. Since Aegean uses debt to finance its ships, the falling interest rates will definitely have a positive effect in this regard. However, the same goes for Aegean’s smaller regional competitors. Since Aegean is so well capitalized in comparison to these firms, this might slightly reduce Aegean’s strength over these firms. This result will likely be negated by the falling dollar (which makes oil more expensive) and the ensuing environmental regulations that will wipe out much of the Greek company’s competition.
You can check my original argument for Aegean here.
In case you were wondering, I checked the CNBC transcript and the Jefferies analyst never mentioned that his company did work for Aegean. I, on the other hand, will honor the spirit of full disclosure:
Chandler Lutz owns shares of ANW but no other company mentioned.
