Subpar Analyst Showdown

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

That's the thesis of my recurring "Beat the Street with 25 Cents" column. We Fools know that when a Wall Street firm upgrades a stock, investors are likely to bid the stock price up in response. Conversely, when a big-name analyst pans a company, the stock often drops.

But should it rise or drop? If "80% of mutual funds underperform the market," and if the vast majority of Wall Street analysts get more of their picks right than wrong, it seems odd for us to buy or sell stocks based on their say-so. That's why I use "25 Cents" to clue you in on the most clueless stock analysts.

The dirty half-dozen
However, some analysts hog all the attention in "25 Cents." For example, in nearly all of the six columns to date, Maxim Group and Cathay Financial consistently rank among the bottom six slots of the Wall Street roll call (the "dirty half-dozen"). That leaves only four spaces open for other lousy stock pickers to fight over -- and that just ain't fair.

So to spread the wealth, as it were, I'll aim the spotlight a bit higher up the ladder. "Subpar Analyst Showdown" will illuminate a few better-known Wall Street names that consistently score below 50% accuracy in their picks. Not as bad as their less-famous brethren, these names will be better known to the investing public.

By deflating the prestige bubble these firms have undeservingly acquired, I hope I'll help you sleep better, secure in knowing which big-name firms are more often wrong than right. Here's this month's batch of not-yet-ready-for-prime-time players:

Firm

CAPS Rating

Accuracy

A Really Bad Pick

How Bad?*

JPMorgan

81.27

49%

Citigroup (NYSE:C)

46 points

Friedman, Billings, Ramsey

79.81

49%

Network Appliance (NASDAQ:NTAP)

38 points

Jefferies

83.98

49%

Boyd Gaming (NYSE:BYD)

50 points

Lehman Bros

82.45

48%

E*Trade (NASDAQ:ETFC)

87 points

Wachovia

79.56

48%

Sprint Nextel (NYSE:S)

52 points

Leerink Swann

73.47

44%

Wyeth (NYSE:WYE)

11 points

*Namely, how badly is this active pick underperforming the S&P 500?

Lies, damned lies, and statistics (Part 2)
Now, the caveats I've expressed before about CAPS hold true for the above firms as well:

  • We do not count ratings on "half-penny" stocks with market caps of less than $100 million or stock prices below $1.50 per share. Counting such picks could help (or hurt) the accuracy of the numbers reflected above.
  • CAPS is still in "beta." Glitches will surface that could affect our numbers. We'll do our best to squash the bugs as we find them, though, and we invite the named analysts to help us improve our product.
    If you have 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.

Plus, there's one new factor to consider in weighing this column's findings. CAPS' scoring system consists of two parts; we rank firms based on their accuracy, and on how right or wrong the analyst's picks are.

In theory, an analyst can get two picks wrong for every one right, yet still rank very highly among investors. Why? Because if the two wrong picks lag the market by just a percentage point or two, and the third pick turns in an astounding gain, then on average, the analyst's recommendations will outperform the market handily. Picking on one analyst at random, you'll see that despite its subpar accuracy, JPMorgan (a division of Income Investor pick JPMorgan Chase) places in the top 20% of investors by virtue of superb picks such as Deckers Outdoor (Nasdaq: DECK  ) (a former Motley Fool Hidden Gems recommendation, I might add).

To my mind, that doesn't excuse the analyst's inability to outguess a coin flip, but it does mitigate the damage.


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