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Is this the worst analyst call of all time?

Worst analyst call ever?
Worst analyst call ever?

It is notoriously easy to forecast events that have already happened — and to mock those whose predictions missed the mark. Still, with the benefit of hindsight, some calls look especially bad.

One such call is now-defunct Bear Stearns' very bullish take on now-defunct Enron.

In a research report dated Jan. 26, 2001, analysts Robert Winters and Robert Franson reported initiating shares of Enron with an "attractive" rating and slapped a $98 one-year price target on the then-$79¾ stock (yes, this was at the tail end of the fractional pricing days).

It was not to be. A year after the report was issued, Enron shares were trading for pennies. The company filed for bankruptcy protection on Dec. 2, 2001, after a massive and multivalent accounting scandal unraveled.

For Will Ortel, a researcher at CFA Institute, the now-somewhat-absurd report holds some important lessons for all investors.

"More than anything, it's a reminder to question the assumptions of underlying valuation," Ortel said in a Tuesday interview on CNBC's "Trading Nation."

Indeed, once a reader passes some of the near-Homeric language the Roberts use to laud the company ("We strongly believe that Enron can be characterized as being 'at the forefront of the energy marketing and communications revolution' because it appears that the technologies and services that the company is using and developing will literally change the way people live and businesses operate throughout the world"), he finds a convoluted valuation analysis that appears to simultaneously argue that the stock is overvalued and undervalued.

The report states that Enron is trading at 45 times full-year earnings estimates. The problem, the Roberts write in italicized text, is this: "Because Enron most resembles a Wall Street firm in the energy business, one wonders whether an enterprise that is inherently a trading business should be valued at levels that are in fact multiples of what the best trading businesses command. To the extent that this type of valuation perception were to increase in the marketplace, risk in the shares could rise given their comparatively high valuation status."

In other words, hopefully investors do not look at the stock in the way in the analysts did initially.

"While we view Enron as an excellent company with several quality businesses, we are mindful of the firm's high P/E multiple and we are not yet ready to incorporate the extremely generous valuation for Enron's broadband/communication business that other analysts (and Enron itself) have incorporated," the Roberts continue, seemingly making an argument that the stock is already priced too richly.

File photo: Laid-off Enron employees outside Enron headquarters as the company collapsed in 2001
Getty Images

But then, when using two types of cash flow models, the Bear analysts find that the shares should apparently be trading somewhere between $89 per share and $108 per share — settling on $98 to split the difference.

This even though the Roberts admit that given the opacity of Enron's core business, "we are concerned that building and maintaining a meaningful forecasting model will become virtually impossible."

Perhaps they were able to overlook this small issue due to their over-exuberance.

"All told, with consistent earnings and cash flow from the Transportation business, market dominance in the wholesale and retail sectors, and projected hypergrowth in its broadband business, Enron's long-term vision is to possess unbeatable scale and scope in every business and region in which it operates," the note declares — right before the beginning of a section entitled "Reasons to Invest."

Obviously, anyone using Enron's numbers was at a disadvantage, given that the numbers turned out to be doctored. But to Ortel's mind, that language should have immediately triggered a warning bell in the minds of investors.

Such grand ambitions "should give you questions about the attainability of the firm's vision," he said.

More generally, for those overly willing to take analyst calls at face value, Bear Stearn's Enron note should serve as "a reminder to question the assumptions of underlying valuation."

It also serves as a valuable and rather amusingly dusty piece of Wall Street history.

Neither Robert elected to comment for this article.