GLOBAL INVESTING: Study throws doubt on value of analyst picks RECOMMENDED STOCKS UNDERPERFORM S&P:
Financial Times; May 31, 2001
By ALISON BEARD
Investors who bought into a Standard & Poor's 500 index fund four years ago would have amassed at least five times more money than those who followed the recommendations of Wall Street analysts.
Fifteen of the 19 largest US brokerages issued money-losing stock tips during that period. Even following the most accurate analyst recommendations - from Credit Suisse First Boston - would have earned investors less than 8 per cent. The S&P 500 gained 58 per cent since 1997 despite last year's sharp decline.
The new data, available on Investars.com, an investment information website, is the latest evidence supporting critics of sell-side research who argue that analysts have become boosters for their firm's investment banking clients.
It also gives a fillip to index fund providers, which charge minimal commission fees compared with brokers buying and trading in private accounts and active US equity fund managers. The fee on Vanguard's S&P 500 fund is 18 basis points.
"It's a matter of credibility with investors," said Kei Kainpoor, chief executive of Investars, which breaks its data down by analyst, sector and stock, as well as firm.
"We want to identify the little guys who are doing their work but overall they have grossly underperformed the Nasdaq, the Dow, the S&P, the market by any measure."
Recommendations from boutique brokerages, which covered between 100 and 500 stocks, outperformed their larger competitors. An investor following Gruntal and Schroder analysts' picks would have got the best returns, with gains of 20.9 per cent and 13.2 per cent respectively. Six other firms were in the black but their picks would still have returned less than 10 per cent over the four years. Some 27 of the 34 smaller companies lost money on their recommendations.
Investars' researchers generated the results by hypothetically investing Dollars 300,000 in every stock to which an analyst gave a "buy" rating. If the stock was upgraded to a "strong buy", the researchers added Dollars 150,000. A downgrade to "outperform" meant offloading Dollars 100,000 in shares.
Wall Street analysts rarely issue "sell" recommendations. In recent years, investors interpreted a "neutral" as a sell and "outperform" or a similar rating as neutral.
Investars is not the only one to notice this trend. Bulldogresearch.com is another website that tracks sell-side analysts' recommendations while mutual fund trackers Lipper and Morningstar are, in essence, rating the buy-side research of the companies they cover.
"We want investors to be able to identify the right analysts in the right sectors," Mr Kainpoor said.
On Investars.com investors can see why an analyst's recommendations might cost them. "You can see this guy upgraded when the stock was high and downgraded when things were down, or vice versa," said Mr Kainpoor.
Merrill Lynch was one of five big companies which would have delivered a positive return on Cisco Systems, the internet equipment maker. The stock, which was at Dollars 7.75 at the beginning of 1997, has gained nearly 150 per cent since then, including a drop from Dollars 80 to below Dollars 20.
Merrill Lynch's analysts put a late "buy" rating on the company in December 1997 but downgraded it earlier than most of their competitors in December last year. They did not capture all the gains they could have but still realised a 177 per cent profit.
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