Recent headlines have cast doubts on the honesty and ability of securities analysts. That may be a bum rap. Although there certainly are analysts with poor records, as a group they’ve done fairly well.
One study followed 55,000 recommendations by security analysts, from 1985 through 1998. The authors concluded that the stocks analysts pick beat those they dislike by at least 6 percent annually, over time. Therefore, it pays to run with Wall Street’s popular favorites.
Thanks to the spread of the Internet, consensus analysts’ recommendations that have been compiled by firms such as Zacks Investment Research and Multex are widely available online. By averaging opinions, stocks are rated from 1 (best) to 5 (worst). Changes in analysts’ recommendations show up as a percentage increase or decrease.
According to the study mentioned above, the change in the consensus opinion is a strong predictor of performance. Thus, you likely will do well if you buy stocks that are moving up, in the consensus of analysts, and sell those that are moving down.
