The Day Ahead: What happens when analysts stop cheering

Dot-coms are finding it hard to keep the attention of analysts
Written by Larry Dignan, Contributor

Theglobe.com reported its latest quarter and introduced its new chief executive to investors Thursday night, but few folks noticed. That's what happens when Wall Street analysts stop watching.

Theglobe.com, which would like you to believe it's on the road to profits, suffers from Wall Street neglect among other things. Simply put, the analysts have mostly given up on the company. When Theglobe.com posted the largest one-day IPO gain, the company had plenty of press. Once VA Linux took the IPO title last year Theglobe.com became a footnote.

Now the company barely has any analyst coverage left, which means there are no cheery "strong buy" ratings from big brokers. You also won't hear "nice quarter guys" on conference calls. Theglobe.com's second quarter conference call was finished in record time -- only one question was asked.

Last night's live earnings Web cast won't boost individual investor interest either. A glitch cut the call short. The conference call line hung up, switched to a busy signal and then left investors with the familiar: "If you'd like to make a call, please hang up and try again later." The replay Webcast works now.

Theglobe.com went from hyped to hopeless last year and now is something worse -- no one cares. Even with a new chief executive who provides adult supervision, it'll take a miracle to get Wall Street interested in Theglobe.com again.

The lack of analyst coverage also made Theglobe.com's second quarter earnings report a bit confusing when it was first announced. The company reported a second quarter loss of 12 cents a share on sales of $8.4m and touted the fact it beat Wall Street estimates of 39 cents a share. Those results sounded good until you looked at the First Call consensus -- there wasn't any. Earnings tracking firm First Call -- the standard on Wall Street -- didn't list any analysts covering the company.

A spokeswoman from Theglobe.com said First Call was off the mark. Jordan Rohan at Wit SoundView covers the company and has a "hold" rating on the stock. In a 17 July research note, Rohan put out an unenthusiastic research note about the appointment of new chief executive Charles Peck and projected a loss of 39 cents a share, which is what Theglobe.com used in its press release.

The first two analysts interested in Theglobe.com happened to work for the two firms (Bear Stearns and the former Volpe Brown Whelan) that were the IPO underwriters. Both analysts at those firms left and coverage dropped following some disappointing developments.

In the end, there's a $2 stock (if you're lucky) and no one rallying investors. To compensate, Theglobe.com dropped a few half-truths in its earnings release. For starters, the company said it reported better-than-expected results for seven straight quarters. It neglected to mention that estimates came down dramatically in July 1999 after the company had product delays.

Theglobe.com also mentioned profitability seven times in its release, but didn't offer any specifics. Rohan has Theglobe.com losing money through 2001.

Derek Brown, an analyst at WR Hambrecht, used to cover Theglobe.com for Volpe. Prudential acquired Volpe and coverage wasn't picked up after Brown left. In Bear Stearns case, analyst Scott Ehrens left and the brokerage didn't pick up coverage. It didn't help matters that Theglobe.com has had its share of turbulence.

"There's no set formula why coverage is dropped," said Brown, who added that company performance, analyst turnover and management changes all contribute to the decision.

The other factor is that life is too short to focus on companies that can't make the cut -- no analyst is going to make a career out of predicting Theglobe.com's stock price. There are hundreds of companies going public each year and there aren't enough analysts to cover every one.

At least Theglobe.com isn't alone.

Quietly, analysts are dropping coverage of dot-coms that they were supporting just a few months ago. The analysts, who mostly worked for underwriters, propped up companies that probably had no business going public anyway. And as long as the stock prices went up, it was OK.

Ryan Alexander, an analyst at Wit SoundView, quietly dropped coverage of USsearch.com on 1 August. "Effective today, 1 August, 2000, we have discontinued research coverage of US Search.com," said Alexander in a short note.

Alexander, who didn't return our phone calls, started coverage of USsearch.com a year ago with an outperform rating and called the company "a cost-effective people information search".

Now there's one unnamed analyst at Robertson Stephens covering USsearch.com, according to earnings tracking firm First Call. The company reported earnings on Thursday.

Drkoop.com could be the most dramatic example of how quickly analysts can bail out on a stock. The company went public just a little more than a year ago with Bear Stearns, Chase H&Q and Wit Capital as underwriters.

We can recall Chase H&Q's glowing research on Drkoop.com like it was yesterday. Now Drkoop.com is in critical with no cash and no merger prospects. And there's only one analyst left standing -- Caren Taylor of E*Offering. Taylor has a "hold" rating.

Can any of these downtrodden dot-coms grab Wall Street analysts' interest again? Sure. "They could do it," said Brown. "But they have to build up a healthy track record to grab attention."

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