We tend to put down analysts as being overly optimistic about stocks, but are pessimistic analysts any better?
The question has become an important one among investors, due to the puzzling spread between the share price of Research In Motion Ltd. and the average analyst opinion on the stock.
The shares have been doing relatively well over the past six months, doubling from their lows amid rising expectations for the company’s new lineup of smartphones, the BlackBerry 10.
Yet, just 15 per cent of analysts recommend the stock as a “buy” after Goldman Sachs lowered its recommendation to “neutral” this week.
What’s more, the average 12-month price target among analysts is about $12, which means that the actual share price of RIM is about 20 per cent above analysts’ targets.
According to Bloomberg News, that’s by far the highest “premium” among all 239 stocks within the S&P/TSX composite index. It’s also a rarity, given that most share prices are well below bullish analyst targets.
Contrarian investors might see the premium on RIM shares as a good reason to buy the stock: Without bullish analysts, expectations are low, giving the stock plenty of room to rise if RIM’s prospects show the slightest improvement.
However, research suggests that analyst targets don’t have a lot of usefulness in predicting the direction of share prices – and bearish target prices are no better than bullish ones.
Ireneus Stanislawek of Switzerland-based 1741 Asset Management looked at analyst recommendations for stocks in the MSCI World Index over the past 10 years. He found that the stocks with the best ratings underperformed the average of all stocks over the subsequent one-, three-, six- and 12-month periods.
Stocks with the worst ratings also underperformed, while stocks in the middle – with “bad” “medium” and “good” ratings – performed the best. His conclusion? “There is virtually no statistical correlation between a stock’s rating and its subsequent performance.”
But before you disregard what analysts are saying about RIM, and other stocks, keep in mind that analysts’ revisions could matter a lot more than their actual opinions.
Ronen Feldman at the Jerusalem School of Business Administration, Joshua Livnat at the Stern School of Business Administration and Yuan Zhang at the Columbia Business School, found that stocks tend to follow revisions in analyst recommendations and target prices – largely because these revisions occur relatively infrequently, which increases their importance to the market.
The result, they argue, “has important implications to investors who can better position their portfolios to take advantage of recent analyst revisions.”
In the case of RIM, analysts have certainly been busy: So far this year, there have been at least 16 revisions to their opinions on the stock, in terms of target prices and recommendations.
There is no clear pattern here; six of the changes have been upgrades, and 10 have been downgrades. Yes, it’s a muddle. And that might explain why the share price is bouncing from one opinion to the next.