"Got a quarter? Can you flip it? Congratulations, you're a stock guru."
That's the theme of my column, "Beat the Street with 25 Cents." 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 wrong than right, it seems odd for us to buy or sell stocks based on their say-so. That's why "25 Cents" can clue you in on the most clueless stock analysts.
The dirty half-dozen
Some analysts hog all the attention in "25 Cents." In nearly all of them so far, Maxim Group and Cathay Financial have occupied two of the bottom seven (the "unlucky seven") slots on the Wall Street roll call. That leaves five spaces open for other lousy stock pickers to fight over -- and that ain't fair.
To spread the wealth, as it were, we've introduced "Subpar Analyst Showdown" to raise the spotlight a bit higher up the ladder. Here, we illuminate a few better-known Wall Street names whose picks consistently reflect an accuracy rate of less than 50%. They're not as bad as their less-famous brethren, but their names are 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:
*How badly this active pick is 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. But the reverse is also true.
Picking on one analyst at random, you'll see that despite approaching the level of accuracy of a flipped coin, CE Unterberg Towbin nonetheless places in the bottom 20% of investors. The reason: Simply put, its losers are costing it many more points than its winners are making up.
Unterberg needs to notch a few more winners like its Shanda Interactive
(Nasdaq: SNDA ) pick if it's to climb in the rankings. That stock nearly doubled in value over the past 18 months, is rated four stars by the CAPS community, and earned a recommendation from our very own Motley Fool Rule Breakers team -- nearly two years before Unterberg found it.
Check back in with us next month.
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