Wednesday, August 16, 2006

Analysts "Hot Buys" falling way, way behind their "Dump It" stocks

Back in March, here and here, I detailed two model portfolios, one of which analysts said was going to underperform, while the other portfolio was the subject of numerous "strong buy" analyst recommendations.

As originally suggested, these look like they have turned into valid contra-indicators, with the "strong buy" portfolio, now displaying an average loss of -20.0% (similar median loss), and with only 4 of the stocks having any type of positive return. (Prices measured at market close on Friday Aug 11, 2006)

On the other side of the coin, the underperform portfolios, both in the Canadian and US versions, have both produced a positive average return. This has amounted to an average gain of +5.6% (median of +5.7%) for the Canadian stocks, and +3.7% average (+7.5% median), for the US stocks.

This again suggests that "value" stocks remain consistently underestimated, even (especially?) by professional analysts. (Follow link contained here and here to see possible reasons why).

Makes one wonder why they'd have any money in almost any conventional mutual fund, (with a few notable exceptions [Bill Miller, Marty Whitman, etc.])? Next time your broker trots out the "strong buy" recommendation, it's OK to leave the room screaming,

No, you'll never take me alive ... or my money ...


The Confused Capitalist


Rick said...

Once again, you've done some really terrific work! Great companies are not necessarily great stocks...they may reflect that perception and consequently, there is little to be gained from a widely held expectation. But miss that expectation, and look out below! Unfortunately, many analysts are as subject to the fads and fashion that the broad public may have. Expected growth is determined for many of them by extrapolation of the previous trend. As well, analysts love to cluster with other their growth assumptions, in their estimates, and in their ratings. Iconoclastic analysts don't get to participate in conference calls with managements either. Hence, it's almost a natural social force that creates this group think, and we all know, that if we are all thinking the same, ain't nobody really thinking!

Jay Walker said...

Thanks Rick. Appreciate it.

Readers, I heartily recommend that you go visit Rick's blog for some great insight. Check out the "Value Discipline" link on the right.