Beat the Street With 25 Cents

Got a quarter? Can you flip it? Congratulations, you're a stock guru.

For months now, I've been using Motley Fool CAPS to evaluate the Wall Street wizards who rate stocks, and gauge the likelihood that those ratings will pan out. 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 125 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? Drumroll, please...

By a margin of 60/40, they're lagging the market. Out of 125 professional players, 72 have sub-50% "accuracy" records on their picks.

Wall Street wall of shame
Fasten your seatbelts, folks, because I'm pulling no punches today. Here's a list of Wall Street's unlucky seven least-accurate institutional investors, and a few of the more interesting recommendations they've made (in public, at least), according to CAPS:

Wall Street Worst Firm

Accuracy

Worst Recommendation

How Bad?*

Cathay Financial

28%

Flow International (NASDAQ:FLOW)

35 points

Henley & Company

22%

Internet Capital Group (NASDAQ:ICGE)

5 points

Maxim Group

25%

Corning (NYSE:GLW)

11 points

KeyBanc Capital Markets

27%

Trinity Industries (NYSE:TRN)

24 points

Rodman & Renshaw

32%

Home Solutions (NASDAQ:HSOA)

81 points

CL King & Associates

32%

Circuit City (NYSE:CC)

37 points

Dawson James

33%

iCAD (NASDAQ:ICAD)

49 points

*Which is to say, how badly did the pick underperform the S&P 500 by the time it was closed, or by how much is it currently lagging the market (if still active)?

As you can see, even the "best" firm on this list gets twice as many picks wrong as it does right. If you'll pardon my bluntness, 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 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 Stock Advisor, where 55% of our picks are beating the market, and our average pick outperforms the market by 39 points. This offer is free for 30 days.


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