Beat the Street With 25 Cents

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):

Wall Street Worst

Accuracy

One Especially Bad Recommendation

How Bad?*

Dahlman Rose

9%

Excel Maritime  (NYSE: EXM  )

45 points

RBC Dain Rauscher

11%

Manulife Financial  (NYSE: MFC  )

21 points

Next Generation

21%

Dendreon Corp. (Nasdaq: DNDN  )

35 points

C.K. Cooper

24%

Harvest Natural Resources  (NYSE: HNR  )

29 points

Capital One Southcoast

29%

ENSCO International  (NYSE: ESV  )

26 points

Boenning & Scattergood

31%

NutriSystem (Nasdaq: NTRI  )

30 points

*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.

Well, actually, there is one thing. Just like anyone else, you're welcome to subscribe to Motley Fool Income Investor. Not every stock we recommend turns out to be a winner, but on average, our picks are beating the market. This offer gets you full access free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 833 out of more than 120,000 members. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2008, at 10:40 AM, lucidguru wrote:

    Interesting, there some financial analyst with better accuracy percentage and some portfolios with positive gains this year, see:

    http://www.gainerstoday.com

  • Report this Comment On December 21, 2008, at 10:49 AM, snakeflake wrote:

    I have read this article twice, I still do not understand what 25 cents has to do with it. BTW. I bought EXM a few weks ago and it has doubled since then.

  • Report this Comment On December 23, 2008, at 5:23 PM, TSIF wrote:

    Snakeflake, it's a combination of timing, market reading, and just plain good luck. Did you buy EXM from your own analysis, or because you felt it had sunk too low? The analyst has more availability of material and a duty to do the research and not depend on luck. He's "selling" his/her pitches. Those of us on CAPS are just chiming in with various results and expertise, and telling you to do your own research.

    In regard to the $0.25, what he meant was flip a quarter and you'd be just as well off. Call it heads/tails. Actually, I'd rather just take the opposite of what some of the experts say and then I'd be right 67% of the time. also.

  • Report this Comment On February 02, 2009, at 9:22 AM, snakeflake wrote:

    TSIF,

    I took me this long to get back to the article and response to my comment. About the 25 cents, that went right over my head until you expained it to me but now I get it (flipping a coin). To answer your question about EXM, I was watching mad money (I think) and themn I did some research on it. I don't just go by whatever an expert says, but since I am fairly new to stocks I don't know all of the companies and what they do. When I hear about a stock that is predicted to do good, then I have a name and can do some homework on the company.

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