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Buy, sell, or hold: How good are analyst calls?

They’re the highly paid workhorses of the professional investment world, sweating over spreadsheets, harassing company executives, and churning out reports to a voracious community of clients.
Their research and forecasts set the benchmark for investors large and small and form the earnings expectations which listed business “miss” or “beat” come reporting season.
All that work boils down to a target share price and a “buy”, “hold” or “sell” recommendation.
But at the end of the day, how good are broker analyst calls?

Overall, not bad, according to exclusive research conducted by Fairfax Media.
The data, provided by Bloomberg, suggests that over the past year adopting a trading strategy that follows the analysts’ calls would have yielded you an extra 1.1 per cent on top of the 14.2 per cent median total return (that is, including reinvested dividends) delivered by the top 200 stocks over the period.

The return figures are calculated based on a strategy of buying the stock when the analysts said “buy”, ignoring a stock’s return when the street said “hold”, and taking a short position – and therefore profiting from a share price fall – when they said “sell”.
So it’s not perfect; a “sell” call in an analyst research note doesn’t actually mean “go short”. But it’s as good a proxy for analyst skill available.
Don’t get too caught up in the absolute return numbers – they are an indicator of analysts’ skill in regards to calling a particular stock over the past year.
And the results are skewed in the analysts’ favour. Bloomberg only lists the analysts that would rank in the top five performances in terms of total return.
So returning to the results, the overall average analyst outperformance hides some less flattering numbers.
For example, most of the added value derived from following analysts’ calls is delivered at the smaller end of the market – almost 14 per cent in the 40 or so smallest stocks in the ASX 200.
Focusing only on the top 50 names would have delivered 0.4 per cent underperformance over the 12 months, -2.5 per cent restricting the strategy to the next 50 largest stocks by market capitalisation, and -2.1 per cent for stocks 101 to 150 by size.
The table shows the top 20 listed names, along with the implied return from following analysts calls over the 12 months.
You can see they didn’t do that well calling the banks, aside from NAB, which has been the preferred (and consistently cheapest) of the Big Four. The analysts have been wary of CBA’s valuation, but the market has continued to bid the stock up, hence the analysts’ underperformance.
It’s probably a similar case of perceived full valuation with Telstra, one of the most poorly called stocks among the top names. On the other hand they have done well on BHP and Rio, which have had a reverse in fortune and investor favour.
Turning to the best and the worst, following “the calls of the Street” you would received a 54 per cent return on Wotif, against the stock’s 56 per cent fall. As the table shows, the strategy would have turned losses into gains on a number of stocks, such as Newcrest Mining, Oz Minerals, and Transfield Services. They couldn’t quite turn the lead of Forge shares into gold, but it would have eased the pain.
Analysts’ biggest misses were on hard-running names, like JB Hi-Fi, Platinum Asset Management and Realestate.com.au.