A Little Déjà Vu Should Concern You
-- September 15, 2003

It seems that Wall Street's best and brightest analysts are once again up to their old tricks. Now that tech stocks have surged higher, what's any self-respecting analyst who missed the boat supposed to do? Of course, upgrade stocks in a hot sector "after" the rally. The sad part is that it'll work. Plenty of unsuspecting investors will follow these "new" upgrades. And I suspect most of them will be burned.

Wall Street really is a unique place. Whereas every other retailing establishment on Earth must lower prices to spur demand for their goods, Wall Street raises prices in order to bring in the buyers. And it's the analysts at the "top" houses on the Street who play their dutiful sales role to entice investors as prices move higher.

Analysts are feverishly upgrading stocks and rising price targets on existing buy recommendations, especially across the hottest of sectors -- technology. According to Thompson Financial/First Call, in the seven days ended September 4, there were 11 upgrades to every downgrade among tech stocks in the S&P; 500 index. That compares to just 1.6 upgrades for every downgrade in the previous 90 days.

Consider the fact that the semiconductor sector, as measured by the Philadelphia Semiconductor Index, has surged 20.4% over the last three months through last Friday's close. That's an astounding annualized growth rate of about 109%, for a sector with a negative price-to-earnings ratio. That's right -- over the past 12 months the earnings for the group as a whole are in negative territory. Yikes!

By any stretch of the imagination, semiconductor shares appear overvalued. They are due for a breather at best, and a major correction at worst. But this hasn't stopped the major brokerage houses on the Street from rushing to upgrade the sector as a whole, and many of its stocks in the index last week.

This rush to upgrade stocks after they have reached extreme prices is nothing new. We saw this during the heyday of the Nasdaq rally. To me, it's an excellent contrary indicator. It says tech shares are poised for a correction. In their most important role as salesmen for their firms, Wall Street's analysts have historically been behind the curve -- this time should be no different.

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