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Decoding the new language of ratings

By SCOTT BARANCIK, Times Staff Writer
© St. Petersburg Times
published January 12, 2003

To grasp the ambiguity of some of the new stock-rating systems on Wall Street, consider Brian Smith.

Smith, an airline analyst at Salomon Smith Barney, monitors 15 stocks. Through Sept. 5, he assigned ratings to Delta, Continental and others according to a five-tier system based on price volatility and expected return on investment. He rated eight of the stocks either "buy" or "outperform," seven "neutral," and none "underperform" or "sell."

For purposes of the newly-required public disclosure of ratings distribution, that translated to 53 percent "buy," zero "sell"

When Salomon switched to a three-tier rating system on Sept. 6, however, Harris's stocks were transformed. Instead of comparing each stock against a Platonic ideal, such as a 15 percent annual return, Harris compared them against one another and distributed them evenly. He placed five stocks in the top tier ("outperform"), five in the middle ("in-line"), and five in the bottom ("underperform").

Same stocks, new score: 33 percent "buy," and 33 percent "sell." The typical investor might look at Harris and see an analyst who had seen the light.

But did Harris really mean for investors to sell their shares of underperformer ATA, whose stock price he expects to climb 65 percent over the next 12 to 18 months? Or AirTran, whose price he expects to rise 44 percent?

That's up to the investor. But Harris' ratings suggest there may be better buys among airline stocks. He rates the industry "overweight," tops in Salomon's new, three-level system of sector ratings.

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