John Dorfman says that Wall Street analysts know not of what they speak, and that we'd do best to do the opposite of what they advise or to ignore their stock picks entirely.
The four stocks that Wall Street analysts most despised at the beginning of 2006 posted an average 21 percent return for the year.
The four stocks they most loved returned only 2.4 percent, which was far worse than the return of almost 16 percent on the Standard & Poor's 500 Index.
In short, the despised stocks walloped the favored ones. Is that a freak result?
No, it is not.
For nine years, I have been studying the annual performance of the four stocks that analysts most unanimously recommend, and the performance of four stocks on which they issue an unusually large number of ``sell'' recommendations.
The analysts' darlings lost 3.7 percent a year, on average. The stocks they hated declined 0.2 percent.
Both groups of stocks did worse than the S&P 500, which returned 7.4 percent a year, on average, during the period of the study: 1998 through 2006.
Analysts seem to follow stocks like fads or fashion trends, with little actual reason behind their preferences. I tend to ignore them entirely, and so far so good.
(HT: Sound Mind Investing.)