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, and gauge the likelihood that those ratings will pan out. In recurring columns like "Get to Know a Guru," we met 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.

News flash: 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 124 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 better-than-2-to-1 margin, they're lagging the market. Out of 124 professional players, 83 have sub-50% "accuracy" records on their picks, and four are right at 50-50.

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, along with the worst recommendations they've made (in public, at least), according to CAPS:

Wall Street Worst Firm

Accuracy

Worst Recommendation

How Bad?*

Henley & Company

20%

Akamai (NASDAQ:AKAM)

25 points

Maxim Group

24%

Bon-Ton (NASDAQ:BONT)

78 points

FTN Midwest

26%

Palm Harbor Homes (NASDAQ:PHHM)

52 points

Cathay Financial

29%

Select Comfort (NASDAQ:SCSS)

42 points

Miller Johnson Steichen Kinnard

29%

Santarus (NASDAQ:SNTS)

74 points

Dawson James

30%

TranSwitch Corp (NASDAQ:TXCC)

51 points

*Which is to say, how badly is this active pick underperforming the S&P 500?

As you see, even the "best" firm on this list gets more than twice as many picks wrong as right. What's more, two denizens of this ana-list have appeared in both of the last two editions of this column. Tic-tac-toe -- after three months in a row in the doghouse, I think we can safely say that Maxim and Cathay are, at least, consistently bad. Pardon my bluntness, but you're better off flipping a quarter than paying these analysts for investing advice.

Lies, damned lies, and statistics
Confession time: The numbers above confirm the old adage about mutual funds and the professionals who run and market them. But in a new service like CAPS, which is still in beta, there are bound to be bugs in the system.

Some of those "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 -- they're glitches in the system that 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 54% of our picks are beating the market. With the help of multibagger winners such as Garmin (Nasdaq: GRMN  ) -- which has better than doubled in two-plus years -- our average pick outperforms the market by 39 points. You can subscribe free for 30 days.


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