When it comes to predicting the future, investors might as well be throwing darts at a board, says Brett Arends of Marketwatch -- they might even have better luck.
That's because when it comes to analyst predictions for the year ahead, there is no guarantee. A year is a long time, and most of the surprise bumps in the road can't be fully accounted for.
Reuters reports Blackstone Vice Chairman Byron Wien, among Wall Street's best known prognosticators, presented his 10 surprising predictions for 2012. They go so far as to suggest oil prices will drop to $65 a barrel.
Furthermore, "BlackRock equity strategist Bob Doll foresees double-digit U.S. stock returns, though corporate earnings growth could lag expectations. And one well-known forecaster declared 2012 too hard to predict."
Facing the music
Perhaps this "well known forecaster" has faced the music -- analyst top picks have rarely been the best guideline.
For example, at the start of 2011, the S&P 500 stocks with top buy ratings would have returned -3.5% if you kept the dividends and cashed out at the end of the year.
"Over the previous five years -- you can now make that six -- Wall Street analysts 'top 10' stock picks have actually earned you slightly less over time than the index," says Arends.
Interestingly, in 2011 Wall Street's most hated stocks only fell 4.3%.
"In other words, the 10 stocks that analysts loved the most beat the stocks they hated the most by an average of less than 1% ... Historically, this, too, is something of a pattern. In previous years, the 'most hated' stocks hadn't been much worse than the index, and in several years had done much better."
Business section: Investing ideas
So, how can you protect your portfolio against rising stock market volatility? One way is to search for the stocks that have a high positive correlation to the VIX index, which measures the implied volatility of S&P 500 index options.
In other words, these companies tend to rise if overall market volatility rises.
To refine the list, we also screened for stocks that have seen a decrease in the number of shares shorted (i.e. a decrease in bets that these stocks will decline).
This is significant, especially when you consider that short-sellers tend to be more sophisticated investors (due to the fact that they require strict credit approval to perform these trades). So if these investors are turning bullish on a stock, it's worth paying close attention.
Short-sellers seem to think there's more upside than downside to these names, and past price action shows that these stocks do well if volatility rises. Should any of these names be on your watch list?
List sorted by correlation to the VIX index. (Click here to access free, interactive tools to analyze these ideas.)
1. Complete Genomics
4. Cadence Pharmaceuticals
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. VIX and Short data sourced from Yahoo! Finance, all other data from Finviz
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