Markets can often fool analysts, too
There's an old saying that the stock market will do whatever it takes to make the majority of investors look foolish.
I have a 14-year study that shows it often makes fools of analysts as well.
Beginning in 1998, I have tracked the four stocks that Wall Street analysts love the best at the beginning of each calendar year, and the four stocks they most hate. There's no data for 2008, when I was temporarily retired as a columnist.
Last year, the analysts' darlings achieved a 10.4 percent return, trailing the Standard & Poor's 500 Index, which returned 16 percent. Both figures include reinvested dividends.
It was the 11th year out of 14 that analysts' favorite stocks have failed to beat the S&P 500.
The analysts had one consolation last year. Their favorites beat the stocks they most hated at the beginning of the year. The latter were up 3.1 percent.
A 53 percent gain in Polaris Industries Inc. (PII) and a 39 percent advance by Tesoro Logistics LP (TLLP) helped the analysts. They were hurt by a 9 percent decline in Micros Systems Inc. (MCRS) and a 42 percent plunge by LogMeIn Inc. (LOGM).
Three of the four stocks they hated at the start of 2012 — Mercury General Corp. (MCY), Ferrellgas Partners LP (FGP) and Frontline Ltd. (FRO) — were losers for the year. But the one they despised most, Sears Holdings Corp. (SHLD) returned 45 percent.
The long-term results are worse.
The 14-year average for analysts' favorite stocks is a gain of 0.15 percent. The average for the despised stocks is a gain of 6.12 percent. For comparison, the average for the S&P 500 for those 14 years was 10.2 percent.
In 14 outings, the stocks analysts hate have beaten the ones they love seven times. The adored stocks have won six times, and one year (1998) was a tie.
The moral of this story is that the best pickings are usually found in the middle, in stocks about which analysts disagree.
How can analysts — well paid, well educated, well informed and well equipped — do so badly?
It's simple. Like most humans, they tend to extrapolate recent success or failure into the future. But the world is an unpredictable and cyclical place.
Let's look at the stocks for which the analytical corps shows the greatest enthusiasm.
• Liberty Global Inc. (LBTYA) of Englewood, Colo., gets the blue ribbon with 12 buy recommendations and no dissenting votes. It beats me why. Liberty is the non-U.S. portion of John Malone's cable-and-media empire. It has more than 200 subsidiaries, many of them cable companies, in Europe, Asia, and Latin America. The company has debt of about 800 percent of equity, and posted a loss in five of the past seven years.
• Web.com Group (WWWW) of Jacksonville provides website services for small businesses. It rates 11 buys, with no holds or sells. I don't like this one either. It has posted losses in four of the past seven years.
• MarkWest Energy Partners LP (MWE) has 11 buys. It boasts a nice dividend yield, but I consider the stock pricy.
• Nu Skin Enterprises Inc. (NUS), out of Provo, Utah, distributes high-end cosmetics and nutritional supplements by a direct selling system. Its five-year earnings growth rate is about 30 percent, and the 10 analysts who cover it anticipate more of the same. I think they are too optimistic.
• Ferrellgas LP (FGP), a propane distributor from Overland Park, Kan., is the most hated stock, with six sell ratings and one “hold.” After two years of losses, its book value (corporate net worth) has gone negative.
• Getty Realty Corp., a Jericho, N.Y., company that rents sites to gas stations, is rated “sell” by three of the four analysts who cover it. I recommended it in this column in April 2011, and it has fallen about 21 percent since then. Its relationship with Getty Petroleum Marketing has soured, and it has been scrambling to find other tenants.
• Osiris Therapeutics Inc. of Columbia, Md., is a small company working on bone marrow regeneration for those who have had chemotherapy. It garners one “hold” and three “sells.”
• Sears Holdings Corp., based in Hoffman Estates, Ill., is on analysts' black list for the third year in a row, this time with four “sells” out of six ratings. Hedge fund manager Eddie Lampert is trying to turn the big retailer around, but it's a struggle.
I don't own any of the eight stocks mentioned above. If you put a gun to my head, I would rather own the despised stocks this year than the adored ones.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at email@example.com.