Friday, May 29, 2009

Markets spin on a coin. Analysts move more slowly. Quality bias. Certainty over recovery potential

TO BE NOTED: From Alphaville:

Analysts: These ladies aren’t for turning

Citi has an interesting note out on Friday, examining the ability of analysts to predict turning points in the market.

We’ll save you the suspense of the overall conclusion: analysts are, on aggregate, a bit slow on the uptake — or downtake, if you will.

Here’s the thrust of Citi’s research:
Markets spin on a coin. Analysts move more slowly. Quality bias. Certainty over recovery potential. As a result, bottom-up analysts struggle at turning points. In this week’s note we analyse the analysts. What do consensus recommendations tell us about the recent market performance and what about the change in these recommendations?

To answer the question, they take all analysts’ recommendations from the I/B/E/S databank and translate the ‘buy’, ’sell’, ‘hold’ ratings on individual stocks into a number. For instance, if every rating on a stock is a strong buy then the score is a one. A five is allocated to stocks that are complete sells and three is neutral.

You can see the resulting aggregate in the chart below.

Basically it shows that over the last 15 years analysts have been moderately positive on stocks with an average score of circa 2.47. They were the most bullish at the end of 1999, then spent the next three years becoming increasingly bearish. Bullishness was on the rise between 2002 and mid-2007, before the analysts became bearish again.

Citi - Average IBES recommendations for DJ Stoxx

So how have these bullish and bearish recommendations fared?

Here’s Citi’s chart showing the spread of performance between the top third of stocks measured by analysts’ positive recommendations (i.e. the most loved stocks) and the bottom third by the most negative view (the most hated).

Citi - Spread of performance

Analysts have not fared well in the recent rally. In fact, it’s a rather dramatic reversal in their fortunes, considering that in January and February of this year, analysts had never been so right. In March and April they’ve never been so wrong. Ouch.

Anyway, the point according to Citi, is that analysts have a lot of difficulty predicting or catching up to turning points in the market — hence their lagging behind in the recent bull market. A contrarian, they say, could build a portfolio based on analysts’ most hated stocks that might perform reasonably well.

This either says something about the ability of analysts or the quality of the recent rally. You decide.

Related links:
Charting the ’suckers’ rally’ - FT Alphaville
Montier: ‘Analysts are rubbish’ - FT Alphaville
Ouwww! Get on the good foot! … and go short analytical pessimism - The Long Room


Don the libertarian Democrat May 29 17:21
In this market, most stocks have been moved by the entire market. Hence, the all or nothing results. It isn't a good time to rate decisions about individual stocks. I'm not taking a position on analysts one way or the other, since, possibly, they should consider the entire market if relevant. I'm just saying that we're going through and unusual period. Maybe.

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