INVESTMENT

Maybe the analyst’s recommendation adds value


The average analyst does not add value.

This is something that all investors know for a fact: analysts’ buying or selling recommendations will not lead to remarkable performance in the long run.

Or is it?

A new study may have some doubts about conventional wisdom.

“Across analysts’ recommendations and chaos,” said Viter Azevedo and Sebastian Mueller, CFA, to 5 countries and territories. to 1 million analysts forecast from 1994 to 201 from. Day by day, its most interesting data points analysts’ most favorite and most disgusting stock concerns. Azevedo and Mারller compare the top and bottom 20% equity through the analyst’s recommendation of Sense Kemat and see that on an equal weight basis, U.S. analysts have failed on average. To be sure, it rarely qualifies as a surprise: these results only confirm the popular notion. Why such recommendations do not work in practice, it may have something to do with the rise among US analysts and the choice of glamor stocks.

But these are just the recommendations of US analysts. What from other market analysts? It turns out that a different picture emerges as the focus shifts outside the United States. Every developed market – and almost all emerging markets – has actually achieved meaningful results over time following the recommendations of analysts.

In the chart below, I have collected the results for the developed market only included in the study. The United States is a significant outsider.


Analyst Sense Quantum Stock Recommendation: Performance by Market

List of annual outperformance of the most beloved vs. most hated stocks by the market.

So what sets this study apart from previous research that establishes the general idea that analyst sens reduction recommendations are useless? Why are searches so different? An important difference is that Azevedo and Mueller’s data cover two major bear markets: the dot-com crash of the early 2000s and the global financial crisis (GFC) of the late decade. Thus, the study was able to analyze whether the recommendations of the analysts work well in the bull or bear market. And as we might expect, at low-sentiment levels, such as bear markets or financial crises, analyst recommendations add more performance than high-sentiment periods.

Causes and effects are difficult to distinguish here. Do analysts have deeper insights than most investors and are thus able to get through the wreckage of a crisis and choose really good stocks? Or do investors look to analysts for guidance and follow their recommendations more closely in times of crisis and thus turn their buy-sell recommendations into something like self-fulfilling predictions?

Whatever the answer, research has shown that investors may want to reconsider conventional wisdom on analysts’ recommendations. They can add some value after all.

Be sure to learn more from Joachim Clement, CFA 7 Mistakes Every Investor Makes (And How To Avoid Them) And Risk profiling and tolerance, And sign up for it Clement on investment Comment

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.

Photo Credit: © Getty Images / Maxim Rumiyansev

Joachim Clement, CFA

CFA Joachim Clement, a trustee of the CFA Institute Research Foundation and provides regular commentary here Clement on investment. Previously, he was the CIO of Wellarshof & Partners Limited, and before that, the head of the UBS Wealth Management Strategic Research Team and the Head of Equity Strategy at UBS Wealth Management. Clement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland and Madrid, Spain, and earned a master’s degree in mathematics. In addition, he holds a master’s degree in economics and economics.



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