How to tell if stock analysts are worth listening to

Photo courtesy of CoreMedia Product Demo on Flickr

Photo courtesy of CoreMedia Product Demo on Flickr

Rob Swystun, Pristine Advisers

A lot of people rely on stock analysts to give their feedback about what stocks will perform well. And although it’s been proven time and again that it’s impossible to predict the future, these financial soothsayers still have a lot of sway over who buys what simply by their recommendations.

The question is, though, which analysts can you trust?

For that, the relatively new analyst rating service TipRanks may be able to help you. TipRanks has amassed a database of 35,000 analyst recommendations made over the past four years.

What it’s found is not encouraging.

TipRanks, led by CEO and co-founder Uri Gruenbaum, has found that, not counting neutral Holds, analysts make Buy recommendations a whopping 87% of the time. That’s not good considering that these recommendations fail to meet or beat subsequent S&P 500 index returns more than half the time.

Some analysts are better than others, though. And, more importantly, some analysts are consistently good. And with TipRanks browser add-on (currently still in beta form), you can get to know which sell-side analysts are more trustworthy with your investment dollars.

You can download the free applet and install it on Internet Explorer, Chrome, Firefox or Safari and anytime an analyst’s name pops up in a story, the TipRanks tool materializes and gives you more details on that analyst and his or her peers. TipRanks tracks articles from dozens of financial publications and gives you stats and links that add perspective to analysts’ recommendations.

To give you an example, consider the recommendation given on May 14 by Goldman Sachs analyst Simona Jankowski. She recommended to buy Cisco Systems (CSCO) stock that day. Had you looked at that recommendation in a browser with the TipRanks applet, it would have told you that at the time Jankowski ranked 40th out of the 1,940 analysts TipRanks followed and that 23 out of her last 37 calls had outperformed the S&P 500 index for a cumulative 4.3% in excess return to that date.

And had you taken action on Jankowski’s call and bought the recommended stock, you would have been extremely pleased on May 16 when it beat all expectations and its share price jumped by 13%.

“It helps to know which analysts have good records, or — more importantly — who doesn’t,” says Gruenbaum.

Doing something different than TipRanks is Estimize, which is run by founder and CEO Leigh Drogen, who worked as an analyst at two hedge funds prior to funding Estimize in 2011.

Estimize is a free service that publishes sell-side earnings-per-share and revenue consensus estimates from Wall Street along with estimates provided by an online community of almost 3,000 subscribers to the service, most of who are individual investors. But about 40% of subscribers claim to be buy-side analysts at asset managers.

“The sell-side baseline is an important data set, but just a narrow slice of the pie,” says Drogen. “We include the expectations of all market stakeholders.”

Drogen says that tickers with four or more estimates provided by the online community are more accurate than ones provided by Wall Street about two-thirds of the time. He attributes this to having more data in a set producing a more accurate average.

Mind you, many of the 900 publicly traded stocks that have four or more estimates from the Estimize community are too small to garner a lot of Wall Street attention.

“When it comes down to it, only a small subset of sell-side analysts run their own earnings models, do channel checks, and visit companies,” Drogen says.

So considering the cost of a reliable crystal ball these days, you may just be better off going with one of these free services to help you make your investment decisions.


2 responses to “How to tell if stock analysts are worth listening to

  1. Pingback: Companies that ‘choreograph’ earnings calls perform poorly in following quarters |·

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