Sell-Side Predictions: Sector Focus Is One Key

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By Uri Gruenbaum

Would you trust a painter to fill a cavity?

Or a landscape architect to give you your yearly check-up?

These might sound like silly questions, but it’s important know who to trust. It is more likely that you will trust someone who has experience and knowledge in his or her field over someone who is attempting something new for the very first time. The same theory applies when it comes to finance and your investments. If your portfolio consists of biopharmaceutical stocks, you would not want to consult an analyst who has a history of recommending Internet, retail and technology stocks. How can you trust his or her advice if the analyst lacks deep knowledge of the specific market of interest and has no proven recommendations of these kinds of stocks? Yet, there are still many analysts who only recommend popular, or newsworthy stocks, and refrain from focusing on one sector. And, because they are not strong in one particular market segment, their lack of familiarity with specific trends shows.

Hudson Square analyst Daniel Ernst has a history of recommending non-related stocks from various sectors, such as BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) and TiVo Inc. (NASDAQ:TIVO). BlackBerry is a well-known telecommunications and  wireless equipment company and Tivo is a digital recording set-top device for viewing television. These two companies, one a telecommunications big wig and the other, an entertainment facilitator, come from different sectors. To further diversify his portfolio, Daniel took a chance recommending SELL Twitter Inc (NYSE:TWTR) in November of 2013. Daniel used the brave title, “flip the bird”, to emphasize his point that Twitter was “more than fully valued,” however, he ended up losing -29.1% over S&P-500. He might have been brave to declare such an eye-catching recommendation, but this was clearly Daniel’s first foray into Internet stocks and this loss only added to his -5.5% average return over S&P-500 and a 50% success rate of recommended stocks.

Daniel is not the only analyst who’s portfolio contains a wide spectrum of stocks. Analyst Laurence Balter, of Oracle Investment, has recommended companies such as, Whole Foods Market, Inc. (NASDAQ:WFM) and The Procter & Gamble Company (NYSE:PG). While he did earn positive returns on both of these recommendations, when he decided to take a stab at Apple Inc. (NASDAQ:AAPL), Laurence did not fare nearly as well. Laurence recommended BUY AAPL twice in a row and received -17.7% over S&P-500 and -15.5% over S&P-500. Laurence claimed the selling of the stock was “overdone” and that investors should “backup the armored truck”. But, Laurence’s assessment of the stock was incorrect and his overall average return of -3.1% over S&P-500 suffered because of it.

Laurence also tried recommending SELL GOOG in anticipation of the shares suffering from “an unwinding of a pair trade that pitted Google Inc (NASDAQ:GOOG) against Apple.” Once again, Laurence lacked expertise in this field and ended up losing -4.3% over S&P-500.

On the other hand, analysts who have experience in a particular sector, with a proven track record of success appear far more trust worthy. Like a seasoned doctor, analyst Deborah Weinswig has a lot of experience recommending retail stocks such as, Walgreen Company (NYSE:WAG) and J.C. Penney Company, Inc. (NYSE:JCP). Deborah has a strong understanding of the market and years of experience learning retail’s ups and downs. Out of the 11 times she has recommended JCP she has received positive returns seven times, most recently netting +29.7% over S&P-500. Deborah recommended SELL J.C. Penney Company, Inc. (NYSE:JCP) after noticing, “the turnaround is taking longer than hoped in a softening macroeconomic environment.” This recommendation added to her solid overall average return of +3.8% over S&P-500.

Leerink Swann analyst David Larsen has a history of focusing his financial efforts recommending healthcare and healthcare technology stocks such as, athenahealth, Inc (NASDAQ:ATHN) and Cerner Corporation (NASDAQ:CERN). David’s concentrated interest in health related stocks has earned him a 14.4% average return over S&P-500 with a 100% success rate of recommended stocks! His most recent recommendation about AthenaHealth earned him +45.30% over S&P-500 after pointing out, “We do not believe there are any structural problems with [AthenaHealth’s] core business. Pricing is rational, and the core company and code are in a constant state of improvement.” And David’s earlier recommendation to BUY CERN ended up earning him +13.1% over S&P500 after completing a survey of hospital administrators. Despite its competitor, Epic, David noted, “While our data shows that Epic may take more share than Cerner, we believe that the market is large enough for the next several years. We also expect Cerner to continue to win new physician groups, new Revenue Works and IT works deals, and new hospitals in international markets.”

Various sectors of the market have popular stocks, but these analysts have proven that throwing your hat into multiple rings may not be the best bet. By sticking to what they know best, analysts can allow experience and knowledge to fuel his or her recommendation.

Uri is co-founder and CEO of TipRanks, an analyst accountability company.


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