Wall Street analysts — the people that make all those buy/sell/hold recommendations — take a lot of heat. Over the years, investors have become more and more skeptical of analyst calls, which these days are viewed more as lagging indicators than anything else by the self-proclaimed “smart money.”
For whatever reason, though, analysts have been right on the money so far in 2017. In the chart below, we’ve broken up the S&P 500 into deciles (10 groups of 50 stocks each) based on a stock’s consensus analyst recommendation at the start of the year. Decile 1 all the way to the left of the chart contains the 50 stocks that were most loved by analysts at the start of 2017. Decile 2 contains the next 50 most loved stocks, and so on and so forth until you get to decile 10, which contains the 50 stocks that were the least loved — or most hated — by analysts at the start of the year. For each decile, we’ve calculated the average year-to-date percentage change of the 50 stocks.
As shown in the chart, the 50 most loved stocks by the analyst community at the start of the year are up an average of 11.37% YTD. The next four deciles have posted strong average YTD gains as well, and then once you cross into the bottom half of the S&P 500, performance gets weaker. In fact, the 50 most hated stocks by analysts at the start of the year are actually down an average of 0.74% YTD.
So has the analyst community suddenly gotten a lot smarter and much better at picking stocks? Or is this an example of the popular saying that “correlation does not imply causation?”
Our best guess is that analysts are not doing anything differently this year than they’ve always done. They still like the stocks with the healthiest fundamentals and/or growth prospects and dislike the stocks with the weakest fundamentals. It’s just that investors this year are buying the stocks with the healthiest numbers and avoiding the stocks with the weakest numbers. We’ve indeed seen a huge spike in investor optimism since the election last November based on a number of surveys, and this probably means that more investors are putting money to work. Surely, some of this new money on the retail side could be flowing into the stocks that their brokers’ analysts like most, so that could also be a factor.
Again, for whatever reason, the analyst community is off to a hot start in 2017, so some back-patting is warranted. We have a hunch, though, that eventually these numbers will mean revert, just like most strategies always do.
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