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Traders John Panin, left, and Michael Smyth work on the floor of the New York Stock Exchange Monday, June 4, 2012. The Dow Jones industrial average opened at its lowest level since December after a 275-point sell-off on Friday caused by grim economic signals, especially a dismal report on the U.S. labor market.

Richard Drew/AP

How much importance do you attach to analyst recommendations when sizing up a stock?

Many investors are skeptical about analyst opinions. But let's face it, when a pro says that a stock we own is going places, we tend to feel pretty good; and when a pro tells us to avoid a stock, we can get a bit nervous about taking the opposite approach.

Bespoke Investment Group has taken an interesting approach in sizing-up analyst performance, and it turns out that skepticism works just fine. They took the S&P 500 at the start of 2012 and divided the stocks into 10 groups according to analyst recommendations – ordering the groups from least-liked stocks to most-liked stocks.

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If analyst recommendations were worth something, then you would think that the most-liked stocks would dramatically outperform the least-liked stocks. Unfortunately, the opposite seems to be the case, at least in 2012: The 50 stocks in the S&P 500 with the worst analyst ratings have gained 16.3 per cent this year; the 50 stocks with the best ratings have gained 12.7 per cent.

Put another way, if you had followed analyst recommendations to a T, your performance for the year would have merely matched the performance of the index, meaning that the recommendations added no value. But if you had taken the opposite approach to analyst recommendations and bought the stocks they loathed, you would have outperformed by a substantial 3.7 percentage points.

Here's another way of looking at the numbers, which makes analyst recommendations look a little better. If you compare the 10 stocks they like best to all the other 450 stocks in the S&P 500, the best-liked stocks outperformed by half a percentage point. Is that enough of a gain to make bullish analyst recommendations worth following?

As you mull over your answer, consider this final point. According to Bloomberg News, Apple Inc. remains a much-loved stock among analysts, with 87 per cent recommending it as a "buy" and just 3 per cent calling it a "sell." Meanwhile, Research In Motion Ltd. remains loathed (despite some recent upgrades), with just 15 per cent of analysts recommending it as a "buy" and 35 per cent calling it a "sell."

Which stock excites you more?

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More


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