At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
One of the best stock pickers in the business rediscovered technology last week. Credit Suisse "reinitiated" coverage of the tech sector, assigning ratings to eight of its biggest names. Despite recommending "market weight" (i.e. neutral) investments in the sector as a whole, CS picked three of the eight as likely winners over the next couple of years. Here's how the ratings break down:
- Apple (Nasdaq: AAPL ) , Dell (Nasdaq: DELL ) , and EMC (NYSE: EMC ) -- outperform.
- Hewlett-Packard (NYSE: HPQ ) , IBM (NYSE: IBM ) , Network Appliance, and Sun Micro (Nasdaq: JAVA ) -- perform.
- Lexmark -- underperform.
According to CS, the computer sector is holding up quite nicely in the face of a global economic downturn. The banker projects nearly 14% growth for the world PC market this year, and nearly 13% next year, with both developing and developed markets driving the growth. In fact, CS is so confident in its predictions that it tossed in good words for Infineon and STMicro (NYSE: STM ) for good measure, saying that one will benefit from surging iPhone sales; the other from PC growth.
But does this banker know its stuff? Yes and no. According to CAPS, Credit Suisse ranks in the top 6% of investors overall. Yet it earns this rank despite having a record of just 53% accuracy -- meaning that any given CS pick is nearly as likely wrong as right.
The law of large numbers
Which brings me to the point I want to make today. Hearing that an analyst is right "only 53% of the time" may not inspire a lot of confidence in investors. But before you scoff, look at it this way: Over the two years we've tracked Credit Suisse's performance, this banker has made well more than 600 stock recommendations. Hardly a day goes by (even on weekends) without CS coming up with a new "bright idea." And over the course of all this time, and all these stocks, CS remains consistently more often right than wrong.
Sure, the margin isn't large. But that level of accuracy, when combined with excellent results when CS guesses correctly, has this banker scoring better than 57,800 other rated CAPS players. And that is saying something.
Foolish takeaway
If you're nervous about taking buy/sell advice from a guy with 53% accuracy, I don't blame you. On any given stock pick, I don't like those odds either.
But the bigger the sample size, the more chances those 53 percentage points have to work in your favor. In fact, I'd lay odds that if you buy all the stocks that CS tells you to buy -- Apple, Dell, and EMC this week -- and sell the ones it says to sell (just Lexmark), you'll begin to see the law of large numbers racking up some impressive numbers in your portfolio.
The moral of the story is this: If you know a guy has a 47% likelihood of dropping a basket, don't put all your eggs in that basket. Diversify, diversify, diversify.
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