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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Capital One Financial Corporation | NYSE:COF | NYSE | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
4.95 | 3.42% | 149.56 | 149.59 | 144.19 | 144.64 | 3,796,876 | 00:19:17 |
So on my train ride into work this morning, I thought about those music experts and their strong consensus picks and wondered if expert stock analysts could provide insights or other information that would lead to strong, profitable stock picks. On first thought, you'd think since all this analyst information is highly public, that it's already priced into the stocks and you can’t profit from it. But, herein lies a market anomaly. Let's take a closer look.
Stock analysts provide many different types of data on companies from buy/hold/sell recommendations to earnings estimates to projected growth rates. I tested all this information to see if you can beat the market with it.
Beginning with a universe of the largest 3000 stocks, I ran tests from January 2000 until June 2011 by building portfolios based on each of these analyst metrics. The average annualized return and standard deviation are below:
The above results show that four of these measures outperformed the selection universe and three underperformed. It's interesting to note that the analyst ratings in and of themselves didn't perform better than the selection universe, but the change in analyst ratings did extremely well. So don't just buy a "Strong Buy" because it's a "Strong Buy." It's better to buy a "Strong Buy" that moved from something else (like a "Sell" or "Hold") to a "Strong Buy."
These results also indicate that a company with a high 3-5 year projected growth rate is something that should be shunned like the plague. As you can see, high expected growth usually ends badly. Excluding those companies with expected growth rates above 20%, the returns improve dramatically (10.8% versus -3.5%). Remember this the next time you hear someone hawking a stock with projected growth rates above 20%!
Based on the performance figures above, here's a method for finding stocks to take advantage of the Analyst Anomaly:
Here are 5 great stocks based on analyst data (09/15/11):
COF – Capital One Financial Corp.
Capital One is a bank holding company that gathers deposits and makes loans. Over the last month, analysts have upgraded the stock to Outperform and increased both their quarterly and annual earnings estimates.
IP – International Paper Co.
International Paper operates as a paper and packaging company with worldwide operations. Analysts we surveyed have been upgrading ratings and earnings estimates for this company, which pays a nice dividend too.
NDAQ – The NASDAQ OMX Group, Inc.
Another company with worldwide operations, NASDAQ provides trading, clearing, exchange technology, and securities listing services. A few analysts have upgraded their opinion for this company, but of particular interest is the number increasing their earnings estimates.
PRIM – Primoris Services Corporation
Primoris, a specialty contractor and infrastructure company, provides a range of construction, fabrication, maintenance, replacement, water and wastewater, and product engineering services. Analysts like this company and have been increasing their earnings estimates due to Primoris receiving many new contracts. Last month, the company also increased its dividend.
HURN – Huron Consulting Group Inc.
Huron provides operational and financial consulting services in the US. Last month, analysts upgraded this firm to "Buy" from "Neutral". Earnings estimates have also been increased due to strong demand for the services this company provides.
To conclude, this article presents examples of how you can use pieces of information provided by analysts to beat the market. But just remember, don't believe everything analysts say. Use your own discretion to evaluate what's meaningful and what's not. Everyone has different tastes, so be aware of that.
In case you were wondering, my personal list of top 5 albums ever produced includes: the Beatles' Sgt. Pepper, Dylan's Highway 61, Gaye's What’s Going On, The Clash's London Calling and The Sun Sessions by Elvis. Although it doesn't discuss music, there is a website that discusses various types of stock market anomalies and how you can profit by them. Please visit hema.zacks.com and "profit on!"
CAPITAL ONE FIN (COF): Free Stock Analysis Report
HURON CONSLT GP (HURN): Free Stock Analysis Report
INTL PAPER (IP): Free Stock Analysis Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
PRIMORIS SERVCS (PRIM): Free Stock Analysis Report
Zacks Investment Research
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