"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, a handful of firms have dominated the bottom six slots of the Wall Street roll call, leaving the rest of Wall Street's "heroes" unsung -- and that just ain't fair.
We introduced "Subpar Analyst Showdown" last year 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 higher-profile names will be perhaps 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 Deux)
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 more factor to consider in weighing our findings. CAPS' scoring system consists of two parts; we rank firms based on their accuracy, and on how right or wrong the analysts' 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, most of these analysts still manage to outperform 70% of the investors we track on CAPS. The reason: Every once in a while, these guys will hit a pick totally outta-the-park: Cowen, for example, has netted 12 points' worth of market outperformance with its May 2008 recommendation to buy Activision Blizzard (Nasdaq: ATVI ) . AmTech and Wedbush, who spotted the stock sooner, have beaten the market with this pick by 69 points apiece.
(Incidentally, we also recommended Activision Blizzard here at Motley Fool Stock Advisor. Recommended three times over the past seven years, it's returned an average of 232% in profit-per-pick to our subscribers.)
Still, one pick does not a portfolio make. If a consistent record of success is what you seek from a professional financial advisor, then the verdict is clear: These six bankers don't make the grade.
But we do. Activision Blizzard isn't the only stock rocking the Stock Advisor portfolio. Fact is, fully 63% of our active recommendations are outperforming the market, and our total portfolio has beat the S&P 500's returns by more than 41 points-per-pick over the past seven years. Click this link and join us for a free, one-month trial. There is no obligation to continue.
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