Double Your Market Performance by Betting Against Analysts

The market is roaring, but Wall Street analysts absolutely hate stocks right now. However, if you ignore these analyst ratings and buy the stocks they’re telling you to sell, you have the chance to more than double the performance of the S&P 500 this year.

I know this seems counter-intuitive. And I understand that the market at-large has consistently moved higher this year despite these analyst downgrades. But when analysts become negative, you have an opportunity to outperform even a rising market by picking up shares of Wall Street’s most hated stocks.

It’s difficult to believe the disconnect that we’re seeing right now. Wall Street’s cheerleaders have consistently dissed equities this year. So far in 2012, there has been only one day where we’ve seen more analyst upgrades than downgrades, according to Bespoke Investment Group. That means throughout earnings season, stocks have failed to impress…

But following analysts’ advice probably won’t help you make money — especially in the midst of a potentially important market turning point.

This isn’t just some gut feeling. In fact, there’s plenty of data showing that it pays to bet against analyst ratings…

We saw a similar scenario unfold when the market bottomed after the credit crisis in early 2009. According to Bloomberg, companies in the S&P 500 with the most buy ratings rose an average of 73% in the year after the index started to rise in March 2009. But the companies with the fewest buy ratings easily beat this group, rising 165% during the same period.

If you had simply bought the most hated companies in the S&P in 2009, you would have more than doubled the performance of the S&P by the end of the year.

Obviously, that was in 2009. The market was in turmoil and about to snap back from one of the biggest financial disasters in almost 80 years. These were unusual circumstances. Still, the stocks most in favor with analysts weren’t the most impressive market leaders. The same companies that these experts believed would have the best chance to outperform what was then a hopelessly broken economy fell short — giving way to the companies that these same experts believed to be destined for failure.

But even during a much less volatile time period, stocks that earned the wrath of Wall Street analysts beat the odds and prospered.

Looking at the same data from the 2009 study, you’ll find that betting against analysts also worked in 2010 — a year when the market was back on track and less vulnerable to wild price swings. S&P companies with the most buy ratings gained less than 9% as a group in 2010. But those with the fewest buy ratings rose more than 20%.

Different year, different market — but the exact same result. The hated stocks beat out the stocks with the most buy ratings on them by more than double.

Of course, I’m not advocating for you to just pick a basket of stocks with negative analyst ratings for your portfolio. But if your research leads you to a stock or group of new potential investments, always check what the analysts are saying. If your research runs contradictory to the Wall Street crowd, you might be onto something big…

Sincerely,

Greg Guenthner
for The Penny Sleuth

Double Your Market Performance by Betting Against Analysts was originally featured in the Penny Sleuth.

This story was originally featured on Penny Sleuth.

Read more at Penny Sleuth

Source: