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Why Analysts Keep Telling Investors to Buy

Even now, with the recession deepening and markets on edge, Wall Street analysts say it is a good time to buy.

Still.

At the top of the market, they urged investors to buy or hold onto stocks about 95 percent of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell.

And last month, as the Dow and Standard & Poor’s 500-stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9 percent of stocks, according to Bloomberg data. Many companies have taken such a beating in the downturn, analysts argue, that their shares are bound to bounce back.

Maybe. But after so many bad calls on so many companies, why should investors believe them this time?

When Internet stocks imploded in 2000 and 2001, Wall Street analysts were widely scorned for fanning a frenzy that had inflated dot-com shares to unsustainable heights. But this time around, credit rating agencies, mortgage companies and Wall Street bankers have shouldered much of the blame for the Crash of 2008, and few have publicly questioned the analysts who urged investors to buy all the way down.

“Analysts completely missed the boat again with the subprime and credit crises,” said Jacob Zamansky, a securities lawyer who represents investors. “They should’ve given some early warning signs to investors to bail out, or at least lighten up their portfolios. That warning never came.”

Instead, many recommendations urged investors to hold on to their shares, or double down, as the bloodletting worsened.

On Oct. 8, as Congress and the Treasury Department frantically tried to calm the plummeting markets, a Citigroup analyst upgraded Bank of America to buy. Since then, Bank of America shares have fallen 77 percent.

That same month, Jeffrey Harte, a top-rated analyst at Sandler O’Neill and Partners, also lifted Bank of America to buy, from hold, and a month later, he gave Citigroup the same upgrade, according to Bloomberg data.

“Our ratings are based on 12-month price targets,” Mr. Harte said. “Given the nature of economic cycles and, really, the focus of the new administration, I did expect and still do expect that the sector will improve considerably over the long term.”

With every wrenching decline, stocks seemed to be only better and better bargains to the most bullish market watchers, and their buy ratings seemed to reflect a hope that the market would soon turn a corner.

One analyst at Davenport & Company called the aluminum maker Alcoa a strong buy on March 24, Bloomberg data shows, when its stock was a buoyant $35 a share and commodities prices were rising. He then affirmed the rating 13 times as metals prices plunged, manufacturing dried up and Alcoa shares fell more than 70 percent.

“You can look back and say you were wrong as you go back and try to do a post-mortem on things,” said John Rogers, director of research at the market research firm D. A. Davidson & Company. “I don’t think there’s ever 100 percent accurate predictive expertise. I wish there was.”

In July, Mr. Rogers put a buy rating on Chicago Bridge and Iron , an engineering and construction company whose stock fell sharply during the first half of 2008. The rebound Mr. Rogers hoped for never came: the stock plunged 65 percent more.

Mr. Rogers said he did not expect oil prices, then hovering near $145 a barrel, to dwindle to $40. He did not expect Chicago Bridge and Iron to hit snags on British natural gas developments. And he did not expect such a broad economic downturn.

“If I had a rewind button and I could have done it, I would have downgraded on the day it peaked,” he said. “I was wrong on that, and I think any analyst would have to acknowledge that.”

In their defense, analysts point out that most regulators, economists, journalists and investors failed to foresee this financial catastrophe. And the worsening economy did prompt a cut in their buy recommendations.

Investors, for their part, may have simply been following the lesson that had been beaten into them time and again during the bull years of the last decade: buy cheap because the market will always go up.

“It’s just the way it’s always been.”

“The market went up, up, up and up. You were rewarded for saying, ‘Don’t worry, be happy,’ ” said William A. Fleckenstein, president of Fleckenstein Capital, a money management firm in Issaquah, Wash. “Each time the market went down was a new opportunity to buy the stock even cheaper.”

When the storms of last year hit, few investors realized that this pattern would suddenly vanish, with disastrous results. “They didn’t understand the world they were operating in every year was a false reference point,” Mr. Fleckenstein said.

Still, the optimistic adage holds: the greater the fall, the greater the upside. Just give it some more time.

“Any analyst with a buy rating looks bad in a bear market,” said Anthony Polini, an analyst at Raymond James who rates banks. “This group is dramatically oversold. It’s down 75 percent. If you don’t have some strong buy ratings at this point, you’re doing a disservice to your customers.”

Mr. Polini, who has a strong buy rating on Bank of America, said it was a mistake to cut long-term outlooks for companies just because their stock price fell.

The actual investment recommendations coming from a sales desk can tell a different story from analysts’ publicly released research. To gauge what clients are actually hearing from their investment managers, the investment-tracking firm First Coverage collects buy and sell recommendations from about 1,000 analysts that serve independent and midsize firms.

At the end of January, 34.5 percent of the recommendations seen by First Coverage were for a sell or short call. That was up from 24 percent in December 2007. At the height of the market crash, in October and November, the proportion of sell calls reached about 45 percent.

In all of 2008, sells never outweighed the buys.

Why, even amid cascading losses, could not the majority of analysts simply slash a company’s rating to sell and tell investors to cut their losses?

“It doesn’t matter if you’re in a bear market, a bull market, a flat market, you’re going to get 95 percent of the research coming out telling you to buy,” said Randy Cass, chief executive of First Coverage. “It’s just the way it’s always been.”

Although reforms after the dot-com bubble sought to make analysis more independent by separating it from investment banking, the broader culture on Wall Street still favors bulls.

Some attribute the surplus of optimism to a widespread expectation that stocks — like home prices — will always increase in value over time. After all, the S.& P. 500 has posted annual returns of more than 9 percent during the last 80 years. Analysts did not want to hit the sell button just as the markets bottomed out.