"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 wrong than right, 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 Maxim Group and Next Generation have occupied two of the bottom seven slots of the Wall Street roll call (the "unlucky seven"). That leaves only five spaces open for other poor 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:
*In other words, 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 other 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 Lazard and Piper nonetheless manage to outperform nearly all but the top 20% of investors. The reason: A single outta-the-park pick like photovoltaic pioneer First Solar (Nasdaq: FSLR) -- which has more than doubled for Lazard and nearly octupled for Piper -- can offset a whole lot of Microns and MGICs. That's helped them beat the market, as tracked on CAPS, by nearly two points per pick, on average.
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