For months now, I've been using Motley Fool CAPS to evaluate the Wall Street wizards who rate stocks. In recurring columns like "Get to Know a Guru," we meet the unsung heroes (and villains) of Wall Street. In "This Just In," we put the experts to the test, determining whether their upgrades and downgrades are worth the virtual paper they're printed on.
Today, I want to step back and see the big picture. Using the full breadth of CAPS to take a snapshot of the Wall Street Wise, I'll lay out for you who's hot, who's not, and, overall, whether these analytical hotshots are smarter than a fifth-grader.
Newsflash: They're not
We often hear the statistic: "80% of mutual funds underperform the market." But until now, it's been hard to fact-check that bit of commonly accepted Foolishness. Fortunately, CAPS does something nearly as good. It records every stock pick made by 176 professional stock pickers, from professional talking heads like Jim Cramer to financial bastions such as Citigroup. It tracks the recommendations' performance, and most importantly, it records whether the picks are beating or lagging the S&P 500's return. So how are the experts doing?
Not so hot, as it turns out. Of the 176 professional players tracked on CAPS, only 47 can claim better-than-50% accuracy on their picks.
Wall Street wall of shame
Fasten your seatbelts, folks, because I'm pulling no punches today. Meet "Wall Street's Dirty Half-Dozen" -- the six least-accurate institutional investors on CAPS, along with their worst recommendations (that they've made public):
*Which is to say, how badly is this active pick underperforming the S&P 500?
Now mind you, these analysts aren't always wrong. On (rare) occasion, even the least prescient banker will luck upon a winner. Case in point: Dead-last-placing analyst Dahlman Rose has managed to beat the market by 27 points with its recommendation to buy Nucor (NYSE: NUE ) . Yet on average, even the "best" of the seven firms named above guesses wrong nearly seven times out of 10. Pardon my bluntness, but I think you're better off flipping a quarter than paying these analysts for investing advice.
Lies, damned lies, and statistics
Confession time: The numbers above certainly suggest that the old truism about mutual funds, and the professionals who run and market them, holds true. But in a new service like CAPS (still in beta, by the way), there are bound to be bugs in the system.
Some such "bugs" are intentional, such as our decision to not permit ratings on "half-penny" stocks with market caps of less than $100 million, or stock prices under $1.50 per share. Some are not -- glitches in the system which may unintentionally affect the statistics that CAPS generates. So before the analysts named above cry bloody murder, let me extend the following olive branch: We're listening.
If you've got a gripe about your rating, and the facts to back it up, we'll work with you to fix the problem. Drop our CAPS feedback board a note, and we'll give your arguments a fair hearing. On the other hand, if you're just mad because we're highlighting statistics that you'd rather not advertise, there's not a lot we can do for you.