Anomaly – Listening to the Analysts

Anomaly – Listening to the Analysts

Next up – Grading the Analysts.

One of the unavoidable truths that investors need to grapple with is there will always be people who understand the company they’re investing in better than they do.

If you look at the evidence, for the most part buy/sell recommendations are poorly correlated with future returns. However, there are 5 exceptions to this rule.

1. First, analysts with bearish recommendations on small cap stocks turn out to be correct more often than not.
2. Large cap stocks that analysts strongly recommend generally underperform the market.
3. Newly upgraded stocks continue to outperform the market over the subsequent few months, while those that have been downgraded tend to underperform.
4. Stocks of companies that exhibit a wide dispersion of analyst estimates tend to underperform.
5. Companies whose share price is well above the mean analyst price target tend to outperform.

Combine a few of those and it makes sense that investors should be most enthusiastic towards stocks that analysts have been bearish about, but have recently turned more optimistic on.