Too cheery by half

CITY investment analysts are eternal optimists - and we have the statistics to prove it. The Financial Services Authority, in its new discussion paper on analysts' research, makes much of the fact that the published view of a company is far more likely to be positive if the analyst's investment bank employer has a business relationship with the company being assessed.

The FSA's report is striking. It says: 'The proportion of ''buy'' recommendations made by firms acting as corporate brokers/advisers to the subject company is, at 80%, almost twice as high as the proportion of ''buys'' where the analyst does not work for the corporate broker.'

The disparity is remarkable. But the bigger picture is no less striking. Ignore, for a moment, whether there is a business relationship between an analyst's house and the company he or she is analysing.

The simple point is this: analysts take too positive a view of the companies they look at. The FSA's paper quotes data from Bloomberg two months ago that showed that only 16% of UK analysts' recommendations were sell or underperform.

Let this sink in. Just one recommendation in six was bearish. This was on the eve of the month in which share prices fell by ten%. Analysts were extraordinarily upbeat just when they should have been telling their clients to sell.

For sure, many analysts are asked only to predict whether a particular company's share price is likely to rise or fall relative to the market as a whole, not whether it will go up or down in simple cash terms. But if analysts were doing their jobs properly on this basis, we should still expect sell recommendations roughly to equal buys.

The stark fact is that analysts are far too cheery about the prospects of the companies they analyse. And only part of this cheeriness can be explained by the analysts' reluctance to criticise a company for which their employer acts as adviser.

Look for much less exciting explanations. In part, too many analysts simply lack the critical faculties to peel back the veneer of bullishness that companies put on their finances.

But even more important, analysts will, quite naturally, become attached to the industry that they are meant to scrutinise. It is hard for anyone who has made a living from looking at the table linen industry to declare that all manufacturersof table linen are doomed and investors should sell their shares immediately.

Yes, there probably is some corruption of analysts' output as their firms try to secure corporate advisory work. But simple, old-fashioned sentimentality is the stronger force driving misplaced optimism.

Go quietly

SURELY it is about time that Sir Ian Prosser conceded that he should start returning money to shareholders of Six Continents, the company that we shall always remember by its much more sensible name of Bass.

He conceded some months ago that if he couldn't find a suitable acquisition by the end of the year, he would start handing back some money.

The argument becomes stronger by the day. Six Continents shares have had an awful time over the past three weeks, and now stand scarcely above the depths they plumbed after 11 September. (Even more strikingly, the share price in simple cash terms is lower now than it was in the summer of 1992.)

Prosser has proved himself to be good at selling things: he achieved a very tidy deal when he offloaded Bass's brewing business. But he has been less clever about his purchases. Shareholders with long memories still recall that he overpaid for Inter-Continental. Holiday Inns took a long time to come right.

Prosser is due to retire next year. Retiring chairmen - and this applies particularly to an executive chairman who has run a company for a decade and a half - will always be tempted to go out with a bang.

For Prosser, the temptation must be immense. He has been intimately identified with Bass's transformation from a group embracing things as diverse as brewing, betting shops, off-licences and a holiday operator into a very different beast running hotels and pubs.

It is hard for a man at the end of his career with a company he has dominated for so long to walk away in a low-key, unspectacular fashion.

But with the Six Continents share price plumbing such depths, the cost to the company of buying back a decent chunk of its equity has fallen to a bargain basement level.

In the hotels industry as a whole, a paradox has emerged. The price of hotel companies has fallen steeply. But the price of hotels changing hands has fallen less drastically. In these circumstances, it will be hard for Prosser to find any acquisition that can be justified to the board and his shareholders. Shrinking the company may not be sexy and exciting. But it would be wise.