"Got a quarter? Can you flip it? Congratulations, you're a stock guru."
That's basically 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." Historically, firms like Dahlman Rose and Next Generation have occupied two of 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.
To spread the wealth, as it were, we've introduced "Subpar Analyst Showdown" with the intention of pointing the spotlight a bit higher up the ladder. Here, we 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 to 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:
*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 -- those 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.
In addition, there's one more 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.
For example, you'll see that despite being less accurate than a coin toss, both Kaufman and RBC nonetheless manage to outperform roughly 85% of investors. Every once in a while, these guys will hit a pick totally outta-the-park: RBC's recommendation of Sohu.com (Nasdaq: SOHU ) , for example, is walloping the S&P 500's returns by more than 100 points. Kaufman's Axsys Technologies pick is beating the market by more than 200 points.
(Incidentally, that's not an investment strategy without worth. Our hypergrowth stock team at Motley Fool Rule Breakers recommended Sohu.com to subscribers a few months back, and we're pleased with its performance so far.)
Still, if a consistent record of success is what you seek from a professional financial advisor (and who could blame you?) the verdict is clear: These six bankers don't make the grade.
Beginning Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro, and to receive a private invitation to join, simply enter your email address in the box below.
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