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 columns like "Get to Know a Guru," we met the unsung heroes (and villains) of Wall Street. 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.
Newsflash: 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 180 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?
Answer: Not so hot. Out of the 180 professional players we track on CAPS, only 82 boast better than 50% "accuracy" on their picks -- fewer than 46%.
Wall Street wall of shame
Fasten your seatbelts, folks, because I'm pulling no punches today. Meet "Wall Street's Dirty Half-Dozen" -- the six least-accurate, still-active institutional investors, along with a few of their absolute worst recommendations (that they've made public):
*Which is to say, by how many points is this active pick underperforming the S&P 500?
Now mind you, these analysts aren't always wrong. Case in point: Hapoalim Securities gets a bad rap for its risky (and so far, not particularly prescient) calls in the biotech sector. But Hapoalim also issues regular pronouncements on the health of the solar power industry -- recommendations that for some reason rarely make it through to ratings aggregator Briefing.com, and hence, fail to show up on our CAPS scorecard.
One of Hapoalim's picks that did make it through the data filtering gauntlet, however, was its smart call to sell short Suntech Power (NYSE: STP ) shares back in October 2008. While we love the stock's long-term potential at Motley Fool Rule Breakers, there's no denying that for the past year, it's Hapoalim that's been right about Suntech. The stock has shed more than 12% of its share price, and largely sat out this year's stock market rally, lagging the S&P 500 by nearly 45 percentage points.
Still, by and large, the CAPS record shows that on life science stocks, Hapoalim's advice is at best ignored, and, at worst, serves as a contrarian indicator.
Lies, damned lies, and statistics
Confession time: The numbers above certainly suggest that the old truism about mutual funds, and the professionals who run and market them, 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 in spite of a few misses like Suntech, we are batting .530 on our active picks -- and thumping the market's returns by more than 19 percentage points overall.)
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