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 recurring 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 hot shots 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 171 professional stock pickers, from professional talking heads like Jim Cramer to financial bastions such as Citigroup. 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?
As it turns out, more than half of them are lagging the market. Out of 171 professional players, 83 have 50% or worse "accuracy" records on their picks.
Wall Street wall of shame
Fasten your seatbelts, folks, because I'm pulling no punches today. Meet Wall Street's "Unlucky Seven" least-accurate institutional investors, along with a few of the their worst recommendations (that they've made public):
|
Wall Street Worst Firm |
Accuracy |
One Typically Bad Recommendation |
How Bad?* |
|---|---|---|---|
|
14.3% |
Pep Boys |
48 points |
|
|
20.0% |
Internet Capital Group |
9 points |
|
|
22.6% |
Zumiez |
42 points |
|
|
23.6% |
Lehman Brothers |
53 points |
|
|
25.0% |
Yahoo! |
9 points |
|
|
25.0% |
Napster |
55 points |
|
|
27.3% |
Orasure Tech |
33 points |
*By how many points is this active pick underperforming the S&P 500?
As you can see, even the "best" of the seven firms named above guess wrong more than seven times out of 10. What's more, one denizen holds the honor of having appeared in every single edition of this column ever run: Cathay Financial may well be the worst analyst (or best contrarian indicator) in CAPS history. (Several of the other firms have made repeat appearances here as well.) 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, and the professionals who run and market them, holds true. But in a service like CAPS (still in beta, by the way), 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 less than $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. 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.
