Got a quarter? Can you flip it? Congratulations, you're a stock guru.
For months now, I've been using Motley Fool CAPS to evaluate the Wall Street wizards who rate stocks, and gauge the likelihood that those ratings will pan out. In "This Just In," we put the experts to the test, determining whether their upgrades and downgrades are worth the virtual paper they're printed on.
Today, I want to step back and see the big picture. Using the full breadth of CAPS to take a snapshot of the Wall Street Wise, I'll lay out for you who's hot, who's not, and overall, whether these analytical hotshots are smarter than a fifth-grader.
News flash: They're not
We often hear the statistic: "80% of mutual funds underperform the market." But until now, it's been hard to fact-check that bit of commonly accepted Foolishness. Fortunately, CAPS does something nearly as good. It records every stock pick made by 179 professional stock pickers, from professional talking heads like Jim Cramer to financial bastions such as JPMorgan Chase. It tracks the recommendations' performance, and most importantly, it records whether the picks are beating or lagging the S&P 500's return. So how are the experts doing?
Longtime readers of this column had better sit down for this: Breaking a two-year-long streak of underperformance, Wall Street is actually doing a halfway decent job right now.
Sort of. Out of the 179 professional players we track on CAPS, nearly 60% (106) currently boast 50%-or-better accuracy on their recommendations. So kudos to them -- but what about the 40% of analysts who fall short?
Wall Street wall of shame
Fasten your seatbelts, folks, because I'm pulling no punches today. Meet "Wall Street's Dirty Half-Dozen" -- six of the least-accurate Wall Street investors, along with a few of their worst recommendations:
*Which is to say, how badly is this active pick underperforming the S&P 500?
Now mind you, these analysts aren't always wrong. On occasion, even the least prescient banker will luck upon a winner. Case in point: Dougherty recommended buying shares of pharmacy benefit manager SXC Health Solutions (Nasdaq: SXCI ) back in December, and has watched the shares rocket more than 145% in value since. (At Motley Fool Rule Breakers, we're green with envy; it took us until March 2009 to identify this winner. But our subscribers are enjoying the green regardless -- our recommendation has nearly doubled.)
One thing we don't envy Dougherty, however, is its broader record of guessing right just a bit more than one time in three. Batting .374 is pretty good in baseball, but it doesn't cut it when you've got investors tendering you their hard-earned money in exchange for good advice. So pardon my bluntness, but I think you're better off flipping a quarter than paying these analysts for investing advice.
Lies, damned lies, and statistics
Confession time: The numbers above certainly suggest that the old truism about mutual funds holds true. But in a service like CAPS, there are bound to be bugs in the system.
Some such "bugs" are intentional, such as our decision to not permit ratings on "half-penny" stocks with market caps of less than $100 million, or stock prices under $1.50 per share. Some are not -- glitches in the system which may unintentionally affect the statistics CAPS generates. So before the analysts named above cry bloody murder, let me extend the following olive branch: We're listening.
If you've got 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. On the other hand, if you're just mad because we're highlighting statistics that you'd rather not advertise, there's not a lot we can do for you.
(Well, actually, there is one thing. Just like anyone else, you're welcome to check out Motley Fool Rule Breakers, where we are thumping the market's returns by 14 percentage points per pick on average. This offer gets you access free for 30 days.)
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