Analysts, bless 'em, can be contrarian indicators when they line up together on a particular stock or sector.
A lot of "buy" recommendations can mean that there is too much built-in optimism, leaving stocks prone to a setback when bad news crops up. On the other hand, a lot of "sell" recommendations can mean there is too much pessimism, leaving stocks prone to a bounce.
Bespoke Investment Group looked at analysts' buy and sell recommendations for sectors and stocks within the S&P 500 and found that there is some group-think going on. For example, technology stocks had the greatest percentage of "buy" recommendations, at 58.7 per cent. Financials were near the bottom, with 43.8 per cent "buy" recommendations.
The percentage of "sell" recommendations was also revealing. Financials were at the top, at 8.8 per cent. Technology trailed, at 4.9 per cent. And health care was at the bottom, at just 3.7 per cent.
Meanwhile, companies like Apple Inc., MasterCard Inc. and Google Inc. were the best loved stocks within the index. They attracted the greatest number of "buy" recommendations. At the other end of the spectrum, Eastman Kodak Co., Sears Holdings Corp. and Dow Chemical Co. were the most loathed. They attracted the greatest number of "sell" recommendations.
From Bloomberg: "Huntington Bancshares Inc., the regional lender in Columbus, Ohio, had twice as many 'sell' ratings as 'buys' in December and jumped 66 per cent this year for the fourth- largest advance in the S&P 500 Index. Eastman Kodak Co. and Sunoco Inc. have gained more than 20 per cent after more than 30 per cent of the analysts covering them at the start of the year recommended getting rid of the shares."
Here's a pithy observation, also in the Bloomberg article, that hits home the idea that a lot of optimism from analysts isn't necessarily good for a stock's performance:
"The best kind of company to own is the one where the vast majority of analysts are negative but you see things turning around," said Thomas Wilson, managing director of the institutional investments and private client group at Brinker Capital, which manages about $9-billion (U.S.) from Berwyn, Pennsylvania. "I don't really want to own the stock that has nothing but favorable ratings because the expectations are so high."