ANATOMY OF A COLLAPSE REDUX: ENRON (ENE)
It’s hard to believe it has been roughly two and half years since the collapse of Enron. Some may say it is even harder to believe
that it took that long to see Ken Lay indicted. Yes, this past week one of the big news stories was the indictment of the former
Chairman of the Board and CEO of Enron.
Given all the hoopla surrounding this media event, and the fact that your clients are seeing these news reports, we thought it would
be worthwhile to re-run the “Anatomy of a Collapse: Enron (ENE). You will recall we first ran this feature article back on
December 3, 2001 in the Daily Equity Report. Since then, it has proven to be a marvelous “prospecting tool” for many of you. So
today we wanted to do a redux of sorts on ENE, to once again provide you with this excellent marketing/prospecting story.
Below we have printed, in its entirety, the feature article from December 2001. Use this to go out and tell the story of how
important technical analysis is, and in particular Point & Figure charting; that it can make a huge difference with respect to your
client’s overall investment success.
Enron Redux (from December 3, 2001):
We hate to rub salt in an open wound but I’ve gotten tons of requests in the last couple of days to do an anatomy of a collapse
example using Enron (ENE). For those you new to our service, an “anatomy of a collapse” is where we take a stock that has
absolutely collapsed in price and show how if you had been using the technicals instead of just the fundamentals you have taken
some type of defensive action instead of watching the stock go down the drain as the fundamental analysts continued to rate the
stock a buy. We’re not trying to make fun of the fundamental analyst here. In a New York Times article from December 31st
2000 entitled “How Did So Many Get It Wrong?” Anthony Noto, an internet analyst for Goldman Sachs, says, “`our research is
driven by fundamental analysis and is not influenced by anything else.’ He went on to explain that the companies he follows had
their stock prices drop last spring not because their operations were failing, but because market psychology had changed. He
downgraded the stocks much later because only then had it become clear through his research that the companies’ results were
deteriorating. In hindsight, he said, ‘we should have lowered our ratings sooner. We regret that.’” Mr. Noto makes a very
important point here and that is as a fundamental analyst, he can’t change his rating until the company’s operations change. In the
case of ENE, it might be argued that the fundamental analysts were relying on information that the accounting firms said was
correct but in fact really wasn’t correct. The bottom line to you and your customers is that we have to live in the world of reality
and that is dealing with the stock price. No matter how fundamentally sound a company might be, it the stock price is falling that’s
doing us no good. Sure we can be like Mr. Noto and “regret that” but it doesn’t change the fact that our account lost money and
no one’s going to make that up.
We’ve used the example many times that to get the best investments, like playing the best music, you have to have both hands on
the piano. To sit a musician down at the piano and tell you to play you a song but before he begins you tie one hand behind his
back the music that he makes will be marginal at best. If you let him play the piano with both hands, he’ll be able to make very
beautiful music. Investing is the same way. To use just the fundamentals is like playing the piano with one hand. You increase
your odds of success dramatically if you untie that other hand, the technical side of the equation. From a Barron’s article entitled
“Street Fighting: One Manager’s Strategies For Beating the Pros” from June 22nd 1998, Peter Siris, an all-start fundamental
analyst, was quoted as saying the following, “well, I used to completely disregard charts because I’m a fundamental investor. But
over the years as I look back over the stocks I’ve owned that have done well -- as well as the mistakes I’ve made -- I’ve realized
that the charts very often would have shown me great opportunities to buy and sell, if I had looked at them dispassionately. What’s
more, when I’ve ignored what the charts had to tell, I’ve usually been wrong. As a fundamental investor, I’ve come to understand
that what the charts are saying sometimes is that other people know more than I do about a stock; its movement isn’t just a
question of momentum. If you look at charts of stocks like an Oxford Health Plans -- or almost any of the others that have
cratered 50% in a day -- in almost all cases, in the three or four weeks before they got killed, you could see them topping out and
starting down. The charts, essentially, are the early-warning systems of what the professionals are doing, telling you the direction
in which they’re getting ready to make a major move.” So here’s a fundamental analyst saying that the people really in the know
about the company will begin to cast their vote before those problems show up on the financial statements. The casting of those
votes by the insiders is reflected in the chart.
So let’s get to the chart of ENE along with the fundamental comments along the way. Another thing you might want to do is print
out the PDF chart as that will really give you a really nice long term view of the price action in the stock and anyone can see the
downtrend that this stock has been in since breaking down in the mid 70’s. As you can see, the stock gave you multiple warning
signs that something was wrong and some type of defensive action should have be taken. Marrying the fundamentals and the
technicals gives you better odds of success. There are thousands of fish in the sea, keep only those with the best of both worlds.
Fundamental & Technical Comments on Enron (ENE)
(Fundamental Source: Bloomberg )
~
March 12, 2001:
$61.27
Price Target Cut at Prudential Securities
Reiterated “Strong Buy” at Lehman
March 14, 2001:
$62.75
Raised to “Accumulate” at Commerzbank
March 21, 2001:
$55.89
March 22, 2001:
$55.02
Reiterated “Accumulate” at Commerzbank Capital
March 26, 2001:
$55.02
DWA Comment: “Shares of ENE fell out of bed quickly
after violating the trendline at 68. Rallies have been
useful for selling into or initiating short positions. See little
on the technical side to disrupt that pattern going forward. RS is
in a column of O's and main trend is negative. Initial resistance
is at 60, then 67. Support
52.”
March 29, 2001:
$55.31
Reiterated “Recommend List” at Goldman Sachs
April 4, 2001:
$56.57
DWA Comment: “Remains below the bearish resistance line and
well into oversold territory at present price ranges.
Still, recent action has formed a consolidation pattern on
the trend chart, which can be broken on a move to 54. That
move would break a double bottom and complete a bearish
triangle pattern. RS is in O's here and we would continue
to avoid ENE here. Those looking for a tight trade to the
downside may initiate a short position on the breakout at
54, but keep in mind that we are already oversold.”
April 16, 2001:
$59.44
Reiterated “Recommend List” at Goldman Sachs
April 17, 2001:
$60.00
Reiterated Near-Term “Buy” at Merrill
April 18, 2001:
$61.62
Reiterated “Recommend List” at Goldman Sachs
Reiterated “Accumulate” at Commerzbank Capital
May 2001:
$62.41
Bloomberg Markets:
“Inside Enron: CEO Jeffry Skilling Reinvents His Company –
Again”
May 21, 2001:
$54.99
Price Target Cut at Prudential
June 8, 2001:
$51.13
Reiterated “Attractive” at Bear Stearns
June 8, 2001:
$51.13
DWA Comment: “ENE broke a spread triple bottom at $51 and
remains below the bearish resistance line. This stock has
underperformed while the utilities sector rallied, and now
that the group is beginning to look suspect, this stock is
one to fear. Continue to avoid positions in ENE until we
can see some clear sign of a bottom near-term. The bottom
of the trading band is at 45.
Reiterated Near-term “Buy” at Merrill
June 15, 2001:
$47.26
Reiterated “Buy” at JP Morgan
June 20, 2001:
$45.80
Reiterated “Recommend List” at Goldman Sachs
June 22, 2001:
$44.88
Raised to “Accumulate” at A.G. Edwards
June 27, 2001:
$46.72
Estimate Raised at Goldman Sachs
July 10, 2001:
$49.22
Reiterated “Buy” at JP Morgan
July 13, 2001:
$48.78
Estimates Raised at First Albany
August 13, 2001:
$46.65
DWA Comment: “Stock is making lower tops and lower
bottoms. The move to 42 in July took ENE below its March
lows though the market remains above those lows. This
divergence is typically negative. Also negative is the
trend and ENE is under performing the market. Avoid this
one.”
August 15, 2001:
$40.25
Reiterated “Strong Buy” at Banc of America
Reiterated “Recommend List” at Goldman Sachs
Reiterated “Attractive” at Bear Stearns
Cut to Near-Term “Neutral” at Merrill
August 16, 2001:
$38.93
DWA Comment: “ENE breaks another bottom and all near-term
support at $41. The stock now rests at the bottom of the
10-week trading band, but we will continue to avoid.”
August 28, 2001:
$38.16
Reiterated “Strong Buy” at Banc of America
DWA Comment: “Shares of ENE have fallen well below the
initial bearish price objective of 44 and are now trading a
point shy of the bottom of the 10-week trading band. Still
no convincing sign of a bottom here and plays at this point
are based on pure speculation of a trading bounce.”
Sept 6, 2001:
$30.49
Enron Raised to “Buy” at Sanders Morris Harris
Sept 26, 2001:
$25.15
Upgraded from Accumulate to Buy at AG Edwards;
Price Target $45
Oct 3, 2001:
$33.49
Reiterated “Recommend List” at Goldman Sachs
Oct 4, 2001:
$33.10
Downgraded to “Buy” from “Strong Buy” at AG Edwards;
Price Target $40
Oct 5, 2001:
$31.73
Reiterated “Strong Buy” at First Albany
Oct 9, 2001:
$33.39
Raised to Long-term “Buy” at Merrill Lynch
Oct 16, 2001:
$32.84
Raised to Near-term “Accumulate” at Merrill Lynch
Oct 17, 2001:
$32.20
Reiterated “Strong Buy” at First Albany
Oct 19, 2001:
$26.05
Cut to “Hold” at AG Edwards
Oct 22, 2001:
$20.65
“ENE trading below NAV (25-27)” Reiterated “Buy” at CIBC
Downgraded from “Buy” to “Hold” at Prudential
Oct 23, 2001:
$19.79
Cut to “Reduce” at Edward Jones
DWA Comment: “ENE falls amid SEC inquiries, the chart
breaks yet another bottom at $24 and moves to new chart
lows. Best to let this dog sleep outside until
some sign of a bottom is shown, continue to avoid.”
Oct 24, 2001:
$16.41
Cut to “Sell” at Prudential
Cut to Long-Term “Buy” at JP Morgan
Reiterated “Strong Buy” at Lehman; “the stock is
attractively priced)
Cut to “Buy” at First Albany
Oct 25, 2001:
$16.35
Cut to “Market Perform” at Banc of America
Reiterated “Buy” at Salomon Smith Barney but Target Cut
From 55 to 30
S&P Changes Enron Outlook to Negative
Nov 1, 2001:
$11.99
Cut to Near-Term “Neutral” at Merrill
Reiterated “Buy” at CIBC “but we see no reason to buy
the stock”
Nov 7, 2001:
$ 9.05
Cut to “Sell” at AG Edwards
Nov 9, 2001:
$ 8.63
Cut to “Hold” at Commerzbank
Nov 12, 2001:
$ 9.24
Raised to “Hold” at Prudential
Nov 13, 2001:
$ 9.98
Raised to “Maintain Position” at Edward Jones
Nov 21, 2001:
$ 5.01
Cut to “Market Perform” at Goldman Sachs
Cut to “Hold” at CIBC
Cut to “Sell” at Edward Jones
Nov 28, 2001:
$
.61
Estimates Reduced at Prudential
Cut to “Hold” at UBS Warburg
Cut to “Sell” at Commerzbank Capital
Nov 29, 2001:
$
.36
Cut to “Hold” at Credit Suisse First Boston
Cut to “Underperform” at RBC Capital Markets
Enron (ENE) Point & Figure Chart
85 ---* ----------------------------*
84
*
*
X
X
83
X
B * X * *
X O X
82
X O X O X O X *
X O X
81
X O X O X O X O *
X O |
80
X O X O X O X O --* --------X --|
79
X O X O X O
O X
*
X
X
|
78
O X O X
O X O
* X O X
|
77
O X O
O X O
X O X
|
76
O
O
O
X O X
|
75 -------------------O ----X O X --|
74
O
X O
|
73
O X
X
|
72
O X O X
|
71
O X O X
|
70 -------------------O X O --------*
69
O X
* |
68
O X
*
|
67 -------------------O C ----* ----|
66
O X
*
|
65 -------------------O X * --------|
64
O *
|
63
*
|
62
|
61
|
60 ---------------------------------|
59
|
58
|
57
|
56
|
55 ---------------------------------|
54
|
53
|
52
|
51
|
50 ---------------------------------|
49
|
48
|
47
|
46
|
45 ---------------------------------|
44
|
43
|
42
|
41
|
40 ---------------------------------|
39
|
38
|
37
|
36
|
35 ---------------------------------|
34
|
33
|
32
|
31
|
30 ---------------------------------|
29
|
28
|
27
|
26
|
25 ---------------------------------|
24
|
23
|
22
|
21
|
20 ---------------------------------|
19.5
|
19.0---------------------------------|
18.5
|
18.0---------------------------------|
17.5
|
17.0---------------------------------|
16.5
|
16.0---------------------------------|
15.5
|
15.0---------------------------------|
14.5
|
14.0---------------------------------|
13.5
|
13.0---------------------------------|
12.5
|
12.0---------------------------------|
11.5
|
11.0---------------------------------|
10.5
|
10.0---------------------------------|
9.5
|
9.0 ---------------------------------|
8.5
|
8.0 ---------------------------------|
7.5
|
7.0 ---------------------------------|
6.5
|
6.0 ---------------------------------|
5.5
|
5.0 ---------------------------------|
4.75
|
4.50---------------------------------|
4.25
|
4.00---------------------------------|
3.75
|
3.50---------------------------------|
3.25
|
3.00---------------------------------|
2.75
|
-----------------------------------------------------------------------------------------*
O *
X
*
ß
ß Relative Strength Chart already in O’s having reversed down in
O
* X O X *
December 2000. Peer RS gave a sell signal in July 2000
1
X O X O *
O ----X O X O --* -----------------------------------------------------------------------O
X O X O
*
O
X 2
O
* ß
ß Bearish Resistance Line
O
X
O
* ß
ß Double bottom at $77 after hitting strong resistance in
O
X
O
*
the lower $80 area – supply is gaining the upper hand
O ----X ----O ------------* - while demand is weakening
O
X
O
*
O
X
O
*
O
X
O
*
O X
X
O X
*
O X O X ----O X O ------------------* ---ß
ß Sector goes to Bear Confirmed status at 70%
O X O X
* O X O
*
O
O X *
3
O
*
----O * --------O X -ß
ß Another sell signal after a lower top at 67---------------------*
O X O
*
----------------O X O ------------------------* -----------------------------------------O X O
X
*
O X O
X O
*
O X O X
X O
*
O X O X O
X 5
*
----------------O --O X O --------X O ------------------* -------------------------------O X O X
X O X
*
O X O X O
X O X O
*
O X O X O X
X O X O
*
O X O X 4 X O X O
O X
*
--------------------O X O --O X O X ----O X O --------------------* ---------------------O X
O
O
O X O
*
O X
O X O
*
O
O
6
*
O X
ß
ß Major Bearish Catapult at $51 after
--------------------------------------------O 7 O -----trying to build a base in the 54 to
O X O
60 area but supply was too strong
O X O
*
O X O X
*
O X O X O
*
--------------------------------------------O X O X O -----------------------------------O X O X 8
O
O X O
O
O ß
ß Another double bottom at $42
O ß
ß Another double bottom at $41
----------------------------------------------------O -----------------------------------O
O
O
X
O
X O
----------------------------------------------------O --------X O -----------------------9
X O
O X
X O
O X O
X O
O X O
X O
----------------------------------------------------O --O X --X O -----------------------O X O X O
O X O A O
O X O X O
O
O X O
------------------------------------------------------------O --O -----------------------O ß
ß No follow thru on a
O X breakout below the BRL
O X O
O X O
----------------------------------------------------------------O --O -------------------O ß
ß Double Bottom Sell
--------------------------------------------------------------------O -------------------O
--------------------------------------------------------------------O -------------------O X
--------------------------------------------------------------------O X O ---------------O X O
--------------------------------------------------------------------O --O ---------------O ß
ß Double Bottom Sell
------------------------------------------------------------------------O ---------------O
------------------------------------------------------------------------O X -------------O X O
------------------------------------------------------------------------O X O -----------O X B
------------------------------------------------------------------------O X O -----------O X O
------------------------------------------------------------------------O --O -----------O ß
ß----------------------------------------------------------------------------O X --X -----O X O X O
----------------------------------------------------------------------------O X O X O ---O X O X O
----------------------------------------------------------------------------O X O X O ---O X O
O
----------------------------------------------------------------------------O ------O ß
ß ---O
------------------------------------------------------------------------------------O ---O
------------------------------------------------------------------------------------O ---O
------------------------------------------------------------------------------------O ---O
------------------------------------------------------------------------------------O ---O
------------------------------------------------------------------------------------O ---O
------------------------------------------------------------------------------------O ----ß
ß Continued lower
O
to $ 0.50
~
While we make every effort to be free of errors in the data on our site,
it is derived from data from other sources. We believe these sources to
be reliable but we cannot guarantee their accuracy.
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