Analysts’ Picks No Better Than Throwing Darts

Analysts’ Picks No Better Than Throwing Darts
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Analysts' Picks No Better Than Throwing Darts

It’s the time of year when the geniuses on Wall Street tell you the best stocks to buy for the year ahead.

So-called “analysts’ top picks” are a popular topic on the Street of Shame. For some people it’s just a parlor game. Others pay close attention. These are, after all, supposed to be the brightest and best-informed experts. Analysts are paid hundreds of thousands, maybe millions, a year. They are recruited from the top business schools. They spend months building complex spreadsheets and analyzing securities. They go to company away-days and sit through interminable presentations. They don’t just look under the hood — they take the stocks apart and put them back together again. They know the balance sheets, income statements and cash flows, the industry trends and competition, inside and out.

It’s the time of year when the geniuses on Wall Street tell you the best stocks to buy for the year ahead. So how good are their picks? Brett Arends discusses on The News Hub. Photo: AP

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So how good are their picks?

To give you some idea, I ran the numbers. I looked at how Wall Street analysts top picks fared last year.

A year ago I spoke to the good people at Thomson Reuters, who track analysts’ recommendations. I asked for all the recommendations across the Standard & Poor’s 500 index.

Then I scanned for the top 10 — the stocks with the highest amount of “buy” and “outperform” ratings. These were the cool kids on the block, the best of the best of the best. Supposedly.

They ranged from big names like Apple and Google to Thermo Fisher Scientific(TMO: 46.33, 0.38, 0.83%), Agilent Technologies (A: 37.01, 0.82, 2.27%),Celgene (CELG: 68.51, 0.59, 0.87%) and R.R. Donnelly & Sons (RRD: 15.00,-0.13, -0.86%).

How’d they do?

If you had invested $10,000 in each of these stocks a year ago, banked the dividends, and cashed out at the end of the year, you’d have actually lost money. You’d be down 3.5%, even before trading costs and taxes, meaning you’d have $96,500 left of your stake.

Meanwhile the S&P 500 overall ended the year even. In other words, you’d have been better off just owning an index fund.

So much for Wall Street!

Six of the “top 10” stocks actually lost you double-digits. The median fell 12%.

As I noted a year ago, this is something of a pattern: Over the previous five years — you can now make that six — Wall Street analysts “top 10” stock picks have actually earned you slightly less over time than the index.

Out of whimsy, I also looked at the reverse story: Wall Street’s most hated stocks, the ones the analysts told you to avoid. I screened the Thomson Reuters data for the stocks with the most “sell” recommendations and the fewest “buys.”

It produced an interesting miscellany, from Brown-Foreman (BF.B: 78.99, -0.29,-0.37%) (maker of Jack Daniel’s) to drugs giant Eli Lilly (LLY: 40.29, -0.42,-1.03%), to retailer Sears Holdings (SHLD: 30.12, -0.68, -2.21%), to Warren Buffett’s Berkshire Hathaway (BRK.A: 115,590.00, 380.00, 0.33%) .

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