This Alan Abelson quote last weekend of Merrill Lynch’s Richard Bernstein got my attention:
Rich [Berstein] asserts that the investor who concentrated
on the 50 stocks in the S&P 500 that are followed by the fewest
Wall Streets analysts wound up with a rousing 24.6% gain in the 12
months ended Dec. 29. That handily beats the quite decent 13.6% advance
of the S&P 500, or, for the matter, the 14.6% rise by the index
when calculated on an equally weighted basis.
Neck-snapping, non? For sure, and while the obvious interpretation is that equity analysts are bad for a stock’s health, there are other ways to look at it.
You might, for example, think about why some stocks are over-followed and others aren’t. They tend to be heavily followed when they trade actively and have done well for investors. Those that are less well followed tend to be the reverse: less actively traded, and poorer performers, at least recently. Put differently, you could call Bernstein’s fade-the-analyst-hordes strategy just a restatement of contrarianism with an anti-analyst gloss.
Then again, maybe analysts are just plain bad for stocks. Heck, it’s possible.