Helpful Analysts

As we have occasionally mentioned, it is often hard to fathom why sell-side analysts exist at all. After all, in a bear market you don’t want them, and in a bull market you certainly don’t need them. However, as Brett Arends informs us, there is a sure-fire way to make a lot of money from analyst recommendations: at the beginning of the year, simply make a list of the 10 stocks they hate most, buy them in equal weightings and watch your net worth soar. Easy-peasy.

Below is a chart of three stocks that inhabited the “10 most hated” list at the beginning of 2014 – they returned 30% or more each (dividends included). The entire list returned 19%, beating the S&P 500 Index by one third, and featured just one loser (DE), which lost a mere 1%.

Three exceptional performers from the 2014 “10 most hated by Wall Street analysts” list, returning 30% + each over the year, including dividends – via StockCharts, click to enlarge.

Last year is by no means an outlier, as Arends points out. The strategy works practically every year, and it can make a huge difference to investment returns over time. In fact, it also – perhaps not surprisingly – beats the “10 most loved list” by a stunningly huge margin over the years. In 2014, the “10 most loved” list did return a slightly higher 22.7%, due to two huge gainers (DAL and COV), but it is worth noting that four of the 10 stocks most loved by Wall Street analysts at the beginning of 2014 actually lost ground over the year. This is quite a feat.

“A portfolio of the stocks most hated by Wall Street analysts beat the overall stock market by a wide margin in 2014. Again.

The 10 stocks rated the worst investments on Wall Streets by analysts at the start of 2014 produced an overall return of 19% during the year, including reinvested dividends, according to my analysis using FactSet data.

That beat the S&P 500 SPX by a hefty five percentage points — or, to put it another way, it earned you nearly a third as much as again a simple index fund.

And that isn’t a one-off. I’ve been looking at this data every year for the past seven years, and over that time the stocks the analysts liked the least have outperformed both the stock market index, and the stocks the analysts like the most, by a country mile.

Call this a mild tonic for market mania at a time when everyone is congratulating himself for investing in index funds.

[…]

Go back seven years, to the start of 2008. Imagine at that time you had invested $100,000 in an S&P 500 index fund, reinvesting all dividends, using a tax-sheltered account. Today you’d have about $170,000. Not bad.

If, instead, you had invested that money at the start of each year in the 10 stocks that analysts rated most highly, cashing out on Dec. 31 and then buying the top 10 most loved stocks for the following year, today, seven years later, you’d be slightly better off — you’d have nearly $180,000, according to my analysis using FactSet data.

But now imagine you had done the exact opposite, and each year had invested your money in the 10 stocks that analysts rated the worst. How would you have done? Hmmm.

Today you’d have $270,000. No, really. You’d have earned more than twice as much as investing in a simple index fund.

Color us amazed, but definitely not surprised.

Conclusion:

Sell-side analysts are actually good for something after all. We imagine that’s why they are getting paid big bucks. This reminds us that gold stocks were subject to a slew of downgrades recently. While we don’t know off the cuff which individual stocks are hated the most at present, we can make an educated guess as to which sectors are coming in for the bulk of analyst scorn as 2015 gets underway. Gold stocks, coal stocks, and Russian stocks come immediately to mind.