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Analysts’ enthusiasm for a stock may not match its returns

A simple experiment by a stockbroker that tracked how analyst recommendations fared over the course of 2017 once again underlines why investors are better off doing their own company research

01/03/2018

Simon Adler

Simon Adler

Fund Manager, Equity Value

Over the years, here on The Value Perspective, we have never been shy about poking company analysts with a stick so let’s change things around a little today – and outsource the stick-poking duties to somebody else.

For stockbroker AJ Bell recently went a step further than we ever have and tracked how well UK analysts’ most – and least – enthusiastic recommendations fared over the course of a year.

The role of an analyst 

Investment banks employ analysts to research listed companies and then write detailed notes for their clients explaining why they ought to ‘sell’, ‘hold’ or, more often than not, ‘buy’ shares in those businesses.

Headlines for media coverage of the AJ Bell study, such as The Times’s Analysts’ winners turn out to be losers as ‘sell’ tips beat the ‘buys’, left little room for doubt as to how this particular experiment turned out.

One year really is too short a timeframe to measure an investment but the idea behind the study was simple enough.

First, take the 10 FTSE 100 companies with the highest proportion of ‘buy’ recommendations at the start of 2017 and see how they performed on average over the year.

And then take the 10 FTSE 100 companies with the highest proportion of ‘sell’ recommendations at the start of 2017 and repeat the exercise.

The results were clear.

As you can see from the following tables, the 10 FTSE 100 companies that attracted the highest proportion of ‘buy’ recommendations from analysts going into last year averaged a 9.3% drop over 2017, compared with a 7.6% rise in the UK’s index of biggest stocks.

With a grim inevitability – and symmetry – meanwhile, the 10 companies with the highest proportion of ‘sell’ recommendations averaged a rise of 9.5% over the year.

 

Performance of analysts’ favourite FTSE 100 stocks in 2017

 

Buy

Hold

Sell

Buy %

2017 performance

Shire

25

3

2

86%

(16.7%)

Dixons Carphone

12

1

1

86%

(43.9%)

TUI AG

6

3

1

86%

32.4%

Smurfit Kappa

10

3

1

83%

33.1%

Paddy Power Betfair

13

2

1

81%

0.6%

Babcock International

12

3

1

75%

(26.0%)

Provident Financial

8

2

0

73%

(68.6%)

Informa

13

2

1

72%

6.2%

3i

5

5

0

71%

29.8%

Hikma Pharmaceutical

7

5

0

70%

(40.1%)

Total

 

(9.3%)

FTSE 100

 

7.6%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

 

Performance of analysts’ least favourite FTSE 100 stocks in 2017

 

Buy

Hold

Sell

Sell %

2017 performance

INTU

1

4

10

67%

(10.1%)

Rolls Royce

2

5

12

63%

28.5%

Morrison (Wm)

0

8

9

53%

(4.7%)

Royal Bank of Scotland

2

10

13

52%

23.8%

Admiral Group

3

3

5

45%

9.6%

Antofagasta

2

12

11

44%

48.9%

Marks & Spencer

9

5

11

44%

(10.1%)

Tesco

6

6

9

43%

1.2%

Standard Chartered

7

6

9

41%

17.6%

Pearson

8

6

8

36%

(10.1%)

Total

 

9.5%

FTSE 100

 

7.6%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

 

All of which may leave you wondering about the analysts’ views at the start of 2018 – but, here on The Value Perspective, we would simply note this again shows why we prefer to do our own investment research.

Rather than relying on others, all our investment ideas come from a Shiller-based quantitative screen that itself has been shown to outperform over time.

We then carry out our own detailed analysis of the cheap businesses that emerge from that screen and so draw our own conclusions on the risk/return profile of every company in our portfolios.

Author

Simon Adler

Simon Adler

Fund Manager, Equity Value

I joined Schroders in 2008 as an analyst in the UK equity team, ultimately analysing the Media, Transport, Leisure, Chemicals and Utility sectors. In 2014 I moved into a fund management role and have had experience managing Global ESG and Pan-European funds.  I joined the Value investment team in July 2016 to focus on UK institutional and ethical-value portfolios.

Important Information:

The views and opinions displayed are those of Ian Kelly, Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans and Simon Adler, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated. They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.