Every year, investors pay billions in commissions and fees to Wall Street firms touting stock analysis. Yet evidence shows that Wall Street analysts can't predict the future any better than the local corner fortune teller, a Wall Street Journal columnist throwing darts at the stock pages, or your daughter's brand new Magic 8-Ball.
Apparently, though, analysts do get some of their calls right. But the ones they make in this successful category are far rarer, and you have to look a lot harder to find ones that meet those criteria.
Later in this article, I'll show you five stocks I found for which analyst recommendations may be more accurate than usual. But first, let's take a look at why analysts get so many of their calls wrong.
Getting it all wrong
An article in the WSJ over the weekend reminded readers of a sad but true fact: Wall Street analysts can't be trusted with their recommendations. Pointing to new research, the article noted that while recommendations may have some value in extremely short-term trading, they don't hold up well over periods longer than a few weeks or months.
That's something we've noted on numerous occasions at the Fool as well. For instance, one study from a pair of Penn State academics looked at 20 years' worth of earnings estimates to discover that they grossly overestimated actual results -- by 4 to 6 percentage points, depending on how far into the future they tried to look.
But when Wall Street is pessimistic, you should pay attention. Although buys and holds outnumber sell recommendations by roughly 20 to 1 among S&P 500 companies, those bearish calls tend to have much more value.
What's Wall Street selling?
So which stocks are Wall Street's least favorite right now? I found these stocks near the bottom of the list:
Sears had the worst average rating on the list, with a score of 3.8 on a scale of 1 to 5, where 5 is a sell and 1 a buy.
The poor rating shouldn't come as a big shock. With the company having suffered poor holiday sales and choosing to close 100 to 120 stores, the stock has already plummeted -- and analysts were bearish for much of 2011. After that big drop, it's unclear how much further the stock could fall.
Netflix scored 3.24, reflecting slightly more bearish than bullish sentiment. Six analysts have various buy recommendations versus seven sells.
Unfortunately, here, many analysts missed the timing. Back in the summer, when shares jumped to more than $300 per share, sentiment among analysts was more bullish. Only after the big plunge following the Qwikster debacle and Netflix's price increase did the recommendations get more bearish -- and recent bears have gotten hurt pretty badly so far in 2012.
Hudson City Bancorp
Hudson City was one of the rare banks to survive the financial crisis fairly well. Yet in 2011, the stock fell sharply as the effects of low interest rates underscored the problems that banks have keeping their incomes up.
The consensus analyst rating score of 3.05 reflects only a little more bearishness than bullishness. But already, the stock has bounced off its lows, and if the economy's recent revival continues, Hudson City could come back quickly.
With a score of 3.23, this stock is a surprise entry on this list. With recycling and trash services seemingly always in season, it's hard to envision a down period for the company.
But the problem Waste Management faced in 2011 was weakness from the municipalities and businesses that make up a good part of its customer base. A slow economy also reduced volumes. But if those things reverse, the sky could be the limit for Waste Management.
SUPERVALU weighs in with a 3.06 score. Although many see the stock as a good value play, the company recently announced that it would miss its sales estimates for 2012 and have to scale back the planned expansion of its Save-A-Lot stores. That justifies some analyst pessimism, especially in an ultra-competitive industry in which plenty of players compete.
Whether Wall Street tells you to buy or sell a stock, you should take that advice with a big grain of salt. But while optimism from analysts is easy to find, pros cry wolf a lot less frequently. When they do, it pays to take notice.
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Fool contributor Dan Caplinger is already consulting his daughter's Magic 8-Ball for advice. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Waste Management and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Waste Management and Netflix, as well as writing a covered strangle position in Waste Management and buying calls in SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can believe in The Fool's disclosure policy.