Loans and cash

If you want to get a feel for how difficult it can be for mainstream Wall Street analysts to say “sell” when they know they will incur the wrath of the company in question, their clients, the brokers who work for their firms, and possibly even their employers, consider the brouhaha that greeted PaineWebber analyst Andrew Shore in 1997 when he merely downgraded his opinion on Sunbeam Corp. from buy to hold.
Sunbeam stock had taken off like a rocket, rising from $12 to over $50 following the arrival of a reputed corporate savior named Al Dunlap. Dunlap had a history of cutting costs and streamlining operations at poorly managed companies, and in fact had just engineered a turnaround at Scott Paper, which was then sold to Kimberly Clark and resulted in huge profits for Scott Paper shareholders. Wall Street expected Dunlap to perform the same miracle at Sunbeam, an old-line appliance manufacturer whose stock was in the doldrums due to what Wall Street perceived to be poor management of a potentially powerful brand name. Al Dunlap arrived, full of bravado, and proceeded to lay off employees, close down plants, and issue optimistic projections for the future. Wall Street totally bought Dunlap’s performance, and Sunbeam shares took off. Virtually every analyst who followed Sunbeam sang Dunlap’s praises and expected a breathtaking turnaround, followed by an eventual takeover of Sunbeam—in other words, they expected an exact replay of the Scott Paper scenario.
Mr. Shore, however, had his doubts. He was somewhat skeptical of Al Dunlap from the start, wondering how layoffs and plant closings could possibly turn a low-margin business, faced with cutthroat competition, into a growth stock phenomenon—but he recommended the stock along with everyone else based on the premise that Dunlap’s name and reputation alone would probably take the stock for quite a profitable ride. The trick, he thought, would be to get out in time. Finally, in 1997, Andrew Shore began to notice warning signs deep within the Sunbeam financial statements filed with the SEC. As it turned out, these warning signs were harbingers of huge problems lurking beneath the shiny surface of Sunbeam which eventually pushed the company to the brink of bankruptcy. Shore decided he would pull his buy rating on Sunbeam; yet, even though he suspected a massive deterioration of Sunbeam’s financial situation, he could only bring himself to change his rating from buy to “neutral.” But even this move, which in retrospect proved to be a timid and incomplete decision, made him a virtual Nostradamus compared to his colleagues.
The first reaction to Mr. Shore’s decision to pull his buy recommendation on Sunbeam came from his research associate, who told Shore that he risked a negative reaction not only from Al Dunlap and Sunbeam, but also from PaineWebber clients and brokers. “You realize what you’re doing here, don’t you?” he asked Shore. “If we’re wrong we’re going to be fired,” Shore replied, “but we have to do this.” Shore even felt compelled to contact the legal compliance department at PaineWebber to explain his downgrade of Sunbeam before the downgrade was issued.
When you stop and think about the fear and soul-searching that preceded a mere downgrade from buy to neutral, you have to laugh out loud. Here was a well-known and established security analyst literally shaking in his boots because he was going to downgrade a popular stock to neutral. He was so fearful of being fired— fired!—if he were wrong that he felt compelled to explain his decision in advance to the PaineWebber compliance department, just in case the stock continued to go up and he had to explain himself later. On April 3, 1997, Andrew Shore got on the PaineWebber “squawk box” and reported his downgrade to PaineWebber’s 5000 stockbrokers. Within minutes Sunbeam stock dropped $4 a share. Shortly thereafter, when Andrew Shore checked his voice mail, he was stunned to hear a barrage of “caustic and bitter messages.” “Most of the callers,” author John A. Byrne says, “wanted Shore fired.” Shore, according to Byrne who documented these events in his book Chainsaw, was “horrified by the content” of the messages, which ranged from calling him “stupid and irresponsible” to even worse. “It was a nightmare,” said Shore’s assistant, who bore the brunt of the flak from clients and brokers reacting to Shore’s downgrade. The story had a happy ending for Andrew Shore. Shortly after the downgrade, Sunbeam shocked Wall Street with the announcement that earnings would come in far below expectations. Those who had acted on Shore’s advice saved a bundle—and of course, the congratulatory calls began to flow in.