Markets

Wall Street Ouija: "Psycholinguistic" Analysis of J&J Leads to Short-Sell Rating

By Jim Edwards

Updated on: July 13, 2011 / 11:33 PM EDT / MoneyWatch

Johnson & Johnson (JNJ) CEO William Weldon is used to having his every word parsed by Wall Street analysts, business journalists and bloggers (ahem), but now he has a new techno-critic: Computer Intuition, a Rochester, N.Y., company whose "psycholinguistic" computer analysis of J&J's public statements has led it to believe the company is concealing "structural problems," and thus investors should sell short JNJ stock.

The company claims its software does systematically what the rest of us do anecdotally -- try to extract what J&J is really saying in its official statements and press releases. It does so by looking for words in interviews and speeches that have a high level of emotional "psytensity," thus betraying what management feels most anxious about. They're looking for market-moving Freudian slips from the corner office, basically. CI believes it can "predict the financial future of target corporations":

Computer Intuition analyzes natural language and retrieves elements from the subconscious of decision makers. These decision makers include managers, analysts, reporters, investors, and the general public. To start the analysis we collect everything we can find on a target company, including, articles, press releases, messages, blogs, interviews, etc. We than analyze the data with the Computer Intuition program. The results help us uncover the hidden structural characteristics of the target company. We then use these characteristics in formulating the financial future of the target company.

Here's a chart showing how "average" minds process hints given in companies' published language later than "genius" minds -- and, of course, users of Computer Intuition:

It's entertaining stuff, to be sure. CI did not return a call for comment, so investors should beware of the undisclosed workings of its black-box software.

Caveats done, here's the nut of the firm's take on J&J: The company notes four points, all of which are well-known to investors. The company has had an excess of regulatory oversight triggered largely by its own slow responses to growing problems in its manufacturing of Tylenol and other non-prescription drugs. No news, there. But CI takes that to crisis proportions:

We believe that in the near future, JNJ will be forced to announce a serious health problem with one of its products. Such announcement will cut its stock price. Hence, we recommend shorting the stock for the next few months.

Hmm. J&J has announced 25 recalls since 2009 by the Wall Street Journal's count, mostly as part of J&J's own self-immolating struggle to gets its act together. So predicting that there will be a "problem with one its products" in the future doesn't seem like "genius" to me. And J&J is so diversified that a problem on one product is unlikely to move its stock.

But I'm prepared to eat the relevant amount of crow in the next five months if the stock really does fall on negative headlines to do with its drugs. Stranger things have happened -- like Listerine causing cancer -- after all.

Related:

Image by Wikimedia, CC.