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 firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- NFL notebook: Goodell won’t recuse himself from Brady’s appeal
- Indianapolis 500 notebook: Injury forces another driver out of Indy 500
- Pirates’ McCutchen laughs off pay stub leak
- MLB notebook: Brewers reliever Smith suspended 8 games for using foreign substance on arm
- Sophomore standouts Wiltrout, Geist shine at PIAA meet
- Fighting the scourge of cucumber beetles and deadly bacterial wilt
- Butler Township commissioners to consider new zoning regulations on gas well pads
- Review: Bricolage’s ‘Saints Tour’ is creepy, on-the-move theater
- Murray, Alpha notify West Virginia coal miners of layoffs
- Washington County native to lead Farmington arts center
- Slippery Rock library gains money match to replace undersized home