Sunday, March 05, 2006

Blogosphere pounding analysts

Ding, ding: Round one!

Well, analysts of all sorts are taking a pounding lately in the blogosphere. Many critics have latched onto the sub-par record of analysts in predicting anything, including picking winning stocks, something recently noted in the research study done by European investment house Dresdner Kleinwort Wasserstein, in The Seven Sins of Fund Management (note: link is a pdf file). I don't know if scathing is the right word for some of the conclusions reached therein, so I'll simply quote directly ...
For those of us who think longer term, it would be nice to think that these disturbing findings were merely a reflection of the wider mania that was the investment landscape in 1999. However, our simple analysis of consensus analyst current recommendations and their characteristics, reveals something deeper behind the analysts' behaviour. In the US, the stocks most favoured by analysts tend to be expensive in terms of PE, price to sales, and price to cash flows (PCF). They tend to have very low dividend yields, and very high expected growth rates. They also have high price momentum over the last 12 months.
and further ...
Price momentum appears to be one of the strongest inputs into the analysts' recommendation structure. This tells us something about analysts' time horizons. Price momentum effects are generally found up to around the 12-18 month mark. Beyond that you tend to observe reversals. That is to say, at time horizons beyond 12 months, past losers start to outperform past winners (by 8% in year two on average between 1980-2005).
Noting the poor record of stock selection, a sample reading of current blog comments includes the Nyquist Capitals' blog that recently highlighted one analysts "hold" recommendation of Intel through a recent price rise, his subsequent "buy" recommendation near the price peak and subsequent decline, and then his current revised "hold" recommendation as the price has fallen again.

Peridot Capitals' blog lambasted another analyst for his timing in ditching his Sherwin Williams "buy" recommendation during its recent lawsuit troubles, right at the nadir of its two day plummet. Within days, it subsequently gained about 20% over that intraday low. Peridots summary comment was ... " ... analyst stock picks won't make you any more money than a monkey will throwing darts at the Wall Street Journal stock tables." OUCH!

The Stalwarts blog takes offense at a pointed rebuttal by Michael Eisenberg of Benchmark Capital, wherein Mr. Eisenberg accuses the blogosphere of "drinking its own kool-aid".

Jab, counter-jab. Round two forthcoming, I'm sure.


The Confused Capitalist

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