Goldman's Merrill Lynch (MER) Downgrade Is Too Little Too Late (GS, MER)?

Goldman Sachs (GS) analyst William Tanona took the unusual step today of placing Merrill Lynch (MER) on the company’s so-called "Conviction Sell" list. What’s surprising is not that Tanona considers the embattled Wall Street firm a "sell" but that so many of his colleagues still recommend the stock.

Believe it or not, there are only four sells on New York-based Merrill. An equal number of analysts rate the shares a "buy" or "strong buy." About 13 companies urge investors to hold the stock. One analyst who must not have read much on Merrill lately has a $98 price target on the stock. A close look at the number shows that it does not appear to be a typo.

Tanona’s reasons for trashing Merrill are solid though hardly bold. He probably could have said many of the same things for months.  Merrill trades at the highest price-to-book multiple "despite having some of the most significant exposures to troubled assets such as CDOs, mortgages and leveraged loans… “with these markets still under pressure, we believe additional writedowns and book-value deterioration will continue to plague the stock," according to a summary of the note in Bloomberg News.

In other words, times are going to get much tougher for Merrill Lynch, a sentiment shared by even the most casual reader of the Wall Street Journal. Therein lies the problem with much of what passes for research on Wall Street these days – it’s a day late and a dollar short. The question that investors should ask themselves is why Tanona and the other analysts who follow the stock have been so patient for so long.
          

Analysts have encouraged investors to put up with quite a bit from Merrill including the ouster of Chief Executive Stan O’Neal last year and his outrageous $161.5 million pay package, $19 billion in losses over the past year and an upcoming $5.7 billion write-down in the third quarter.

No wonder Merrill shares are down more than 50 percent this year. Merrill analysts, though, are keeping the faith as the company scrambles to raise cash through the sale of its minority stake in Bloomberg L.P. (where I worked for seven years).and the sale of more than $39 billion worth of stock and bonds to bolster its credit ratings. Chief Executive John Thain also is trying to unload billions in bad loans to Korean Asset Management Co., an effort Bloomberg News says is "faltering" because of a dispute over price.

These are all huge problems but you would never know it judging from the overly bullish calls of many Wall Street analysts.

Jonathan Berr