Right now, according to Wall Street analysts, there are only three companies in the S&P 500 that deserve a unanimous Buy rating, according to FactSet. Of the 505 stocks that FactSet tracks in the S&P 500, 247 are rated as Buy by more than half of the analysts covering them, reports MarketWatch. The three stocks Wall Street has given its unanimous vote of confidence to are: Affiliated Managers Group, Allergan and Delta Air Lines. The consensus price target for each stock is $220.30, $363.06 and $61.33 respectively.
The article seems to imply that analysts are not “that bad” because only three stocks have unanimous Buy ratings. However, this assumption has several problems. First off, large-cap stocks have a ton of analyst coverage, with about 70 analysts covering Apple stock, for example, so while it is true that very few have unanimous Buy ratings from every single analyst, that does not mean analysts are shy from giving Buy ratings. Far from it, in fact.
It is much rarer to see Sell ratings and to show that we present you with the opposite side of the coin as well. So how many companies have unanimous Sell ratings? We guessed zero, and we were correct. S&P Capital IQ was kind enough to run the numbers for us and, using a rating range of 1 to 5.5, only three companies had lower than a 4 rating as of Nov. 17. The companies are listed below. So this exercise shows that analysts do apparently have a bullish bias.
|Company Name||Exchange:Ticker||Avg Broker Recommendation (#)||Index Constituents|
|Transocean Ltd.||NYSE:RIG||3.89||S&P 500 Index|
|Diamond Offshore Drilling, Inc.||NYSE:DO||3.82||S&P 500 Index|
|Consolidated Edison, Inc.||NYSE:ED||3.58||S&P 500 Index|
To check, S&P Capital IQ looked at the MarketWatch article, and it actually says the chart includes stocks that have 100% Buy or Overweight ratings, and when I look for those companies with all Buy or Outperform ratings using S&P Capital IQ’s data, we return the exact same results as FactSet:
- Affiliated Managers Group Inc. (NYSE:AMG)
- Allergan plc (NYSE:AGN)
- Delta Air Lines, Inc. (NYSE:DAL)
And there is more. The big question is whether investors should really care what Wall Street thinks. When it comes to forecasting market movements, Wall Street analysts don’t have the best track record. More often than not, their price targets are overly optimistic.
A simple study conducted by NerdWallet in 2013 showed that only 51% of all analyst ratings on the Dow 30 over the calendar year 2012 were correct. Forty-nine percent of the recommendations turned out to be wrong. Buy ratings made up about 85% of all accurate ratings. Hold ratings performed worst, with only 20% of them playing out as expected.
Moreover, in February, the only company with 100% Buy ratings was Quanta Services. Since the end of February, the stock has underperformed the S&P 500 by 25.6%, excluding dividends.
Wall Street’s record of issuing Sell recommendations seems to be even worse.
S&P 500: Wall Street says sell, but investors keep buying
In July 2014, there were nine stock in the S&P 500 that were almost universally disliked by Wall Street and S&P Capital IQ. The stocks, grouped by USA Today’s Money section, had a Sell or Strong Sell rating from S&P Capital IQ, Very Dangerous or Dangerous ratings from New Constructs, and an average Hold rating from Wall Street analysts. The nine stocks investors were told to avoid were:
- Plum Creek Timber
- Chesapeake Energy
- Vulcan Mat’ls
- Air Products
- Dow Chemical
- Helmerich & Payne
Here’s how the shares of these nine companies have performance since July 2014.
As you can see, all but three of the companies have outperformed that S&P 500 since then.