The answer to the question ‘should you trust Wall Street analyst ratings?’ is simple: it depends who you trust. Following top analysts can help you generate higher returns.
But whether you are a new or experienced investor, chances are you face the conundrum of finding a reliable financial source for stock recommendations. And as more firms and analysts enter the playing field, finding a trustworthy analyst ratings becomes even more challenging. That’s where TipRanks comes in.
Historical performance matters when choosing stock pickers
An academic study published in the Journal of Financial Economics (“Do security analysts exhibit persistent differences in stock picking ability?” by Michael B. Mikhail; Beverly R. Walther; and Richard H. Willis) highlights just why financial accountability i.e. holding analysts accountable to their stock recommendations, is so crucial for investor outperformance.
“We find that analysts whose recommendation revisions earned the most excess returns in the past continue to outperform in the future” say the study’s authors.
This finding holds true regardless of whether performance was measured over the past one, three or five years.
Interestingly the study also finds that the reverse is true: analysts who score the least returns tend to underperform in the future.
And this isn’t just a marginal difference- “excess returns in the one and three trading months following the revision are significant”.
The authors leave investors with the following advice: “historical performance matters when choosing stock pickers” and the longer the analyst’s winning streak, the better.
How to easily find the Street’s top analysts using TipRanks
With this in mind, the obvious question for investors is “How to find these best-performing analysts- and their stock recommendations?”
Most of the time, investors have nothing more to go on than the name of the analyst’s firm or the way in which the analyst makes his recommendation. But both these factors are unreliable measures of success.
Leave A Comment