Buying Lehman on Weakness Could Signal Renewed Faith

Lehman Brothers (LEH) took the number two spot on a long list of stocks showing positive money inflow as share price declined on Thursday 06/12/2008. Here are the stats:

Large block trades accounted for less than 22% of volume with a 2 to 1 ratio favoring the up-tick. This means that the inflow resulted from a broad base rather than a few mega institutional players. In contrast block trade inflow for #1 on the list, Schlumberger (SLB) was at 25%, #3 iShrMSEAFE (EFA) was at 43%, #4 Verisign (VRSN) was at 80% and #5 ExxonMobil (XOM) was at 31%.

Perhaps the broad base buying was perpetrated by the Lehman Brothers Savings Plan!  In any event, this type of trading preludes a sentiment change.

Before the market opened, Deutsche Securities reiterated its 'buy' rating though lowered its target price. The following is our contemporaries' latest take:

Deutsche Securities:

NEW YORK, June 12:  Analysts at Deutsche Bank Securities maintain their "buy" rating on Lehman Brothers Holdings Inc (LEH). The target price has been reduced from $49 to $42.

In a research note published yesterday, the analysts mention that the company has posted weaker-than-expected 2Q08 results, with write-downs/losses of $5 billion, as compared to the estimate of $3 billion. The results exhibit, however, growth in Lehman Brothers Holdings’ investment banking and prime brokerage businesses and an improvement in the performance through the quarter in May and into June, the analysts add.

Credit Suisse:

NEW YORK, June 10: Analysts at Credit Suisse downgrade Lehman Brothers Holdings Inc (LEH) from "outperform" to "neutral," while reducing their estimates for the company. The target price has been reduced from $55-$60 to $35-$37.

In a research note published this morning, the analysts mention that the company has pre-announced its 2Q EPS at -$5.14, significantly short of expectations. Lehman Brothers has announced that it would raise additional $6 billion in common equity and convertible preferred stock. The EPS estimates for 2008 and 2009 have been reduced from $2.75 to -$4.50 and from $6.50 to $3.85, respectively, reflecting the impact of the raising of capital, lower equities capital market expectations and the inclusion of additional real estate inventory write-downs in the fixed income capital markets assumptions.

UBS:

NEW YORK, June 10: Analysts at UBS reiterate their "neutral" rating on Lehman Brothers Holdings (LEH). The target price has been reduced from $42 to $32.

Citigroup:

NEW YORK, March 28: Analysts at Citigroup upgrade Lehman Brothers (LEH) from "hold" to "buy." The target price is set to $65.

In reality, no one has a clue just how low the market will take LEH down before reversing and conforming to normality. The biggest problem is trust. Based on the Bear Stearns (BSC) experience no one knows who or what to believe anymore. Is Lehman holding back vital information? Is the information provided by Lehman accurate at least at the time that it was disseminated?

Can analysts actually run the numbers? Are we all guessing right now since we don't have an inkling of an idea what number to pen into the spread sheets for the total write-down? We've given up on EPS numbers and have no idea how they do it at Credit Suisse (see above). Or take the latest Deutsche Securities research note (above); what does 'improvement in the performance' in already performing segments have to do with the price of tea in China?

Apparently, UBS and Citigroup have it right. State your rating based on your trust or distrust in management and stick a target price on it. The less said the better.

Update: About six hours after the above article was posted, the WSJ posted a new article related to the trust issue. Apparently the WSJ writers are mixing together two different trust issues.

The first issue, which is the thrust of the WSJ article, is 'trust' within Lehman itself. If employees do not believe their own management then one can not expect clients to be holier than the pope.

The second issue is Lehman's public perception by clients, private investors, competitors and most important of all - institutional investors. Here Lehman still has a lot more work to do.

The WSJ title is correct; "In McDade Lehman Trusts", that is to say that McDade is an internal Lehman icon; sort off like the wonder kid who has done no wrong and what he says come to past. The second (sub) title is a WSJ writer's misconception; "Street Firm Turns to Veteran Trader to Allay Investors", this is not true. If the writer were to say that McDade's appointment is to alleviate fears amongst trading partners and clients there would be what to base this on. However, McDade has had little to do with investors' aka LEH stockholders.

Disclosure: No conflicts.

Comments

[venividivici:]

Following the recomendations of these anal ysts is little better than putting your money on the living room floor and setting it on fire.

2008 Jun 13 05:46 AM

[pelican:]

This was a good article, nice job. I expected yet another LEH bashing diatribe, so prevalent these days, but you wrote it very objectively. As you indicated, who knows what the truth is, and trust is a (the?) big issue. It's really perception vs. reality. Maybe they are closely related in this case, maybe not. When I was much younger I knew I was a good credit risk being the responsible guy I think I am (I have never been late with any kind of payment in my life). But many credit card companies turned me down. They thought my age, limited work experience, lack of credit history meant bad risk. They were wrong but they had their perceptions. As a result, I had to take out a short-term loan and show I could pay it off. Many are pointing to LEH's capital raising as proof they are not honest about prior comments made but I have to wonder if they did so because, amid the talk of them being the next Bear Stearns, etc. and the general increase in concern, they felt they had to try and placate investor fears. In other words, were the capital raisings out of financial necessity or were they basically strong-armed into doing it by a panicky investment public. I don't know. Maybe LEH is hiding something etc. Maybe they should've been ahead of the investment community on deciding to raise capital. Or maybe they felt they had no choice given the decidedly pessimistic mood that's taken over. I remember as Y2K approached many became convinced bad things would happen, perhaps in part due to the media. The reality eventually proved them wrong but they didn't know it at the time and perhaps it seemed plausible. Anyway, its good to read an article that basically says "who the hell knows" when so many out there are quick to draw conclusions.

2008 Jun 13 06:46 AM