Analyst ratings missed the mark in 2017

Research under Mifid II spotlight underperformed the market last year.
Russ Mould
22 January 2018

New research from AJ Bell shows that the FTSE 100 firms which attracted the highest percentage of analyst ‘buy’ ratings last January markedly underperformed the index during the year and delivered a negative return:

 

Buy

Hold

Sell

Buy %

2017 performance

Shire

25

3

2

86%

(16.7%)

Dixons Carphone

12

1

1

86%

(43.9%)

TUI AG

6

3

1

86%

32.4%

Smurfit Kappa

10

3

1

83%

33.1%

Paddy Power Betfair

13

2

1

81%

0.6%

Babcock International

12

3

1

75%

(26.0%)

Provident Financial

8

2

0

73%

(68.6%)

Informa

13

2

1

72%

6.2%

3i

5

5

0

71%

29.8%

Hikma Pharmaceutical

7

5

0

70%

(40.1%)

Total

 

(9.3%)

FTSE 100

 

7.6%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

Additionally, the ten companies with the highest percentage of ‘sell’ ratings a year ago, did better than the FTSE 100 index and the list of ten most popular stocks:

 

Buy

Hold

Sell

Sell %

2017 performance

INTU

1

4

10

67%

(10.1%)

Rolls Royce

2

5

12

63%

28.5%

Morrison (Wm)

0

8

9

53%

(4.7%)

Royal Bank of Scotland

2

10

13

52%

23.8%

Admiral Group

3

3

5

45%

9.6%

Antofagasta

2

12

11

44%

48.9%

Marks & Spencer

9

5

11

44%

(10.1%)

Tesco

6

6

9

43%

1.2%

Standard Chartered

7

6

9

41%

17.6%

Pearson

8

6

8

36%

(10.1%)

Total

 

9.5%

FTSE 100

 

7.6%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

Thankfully, the analysts found redemption in the FTSE 250, where coverage can be less intense and the scope for adding value through diligent analysis is potentially greater.

The ten FTSE 350 firms that had the greatest percentage of ‘buy’ ratings in the first week of January 2017 rose by a market-busting 35.4% between them: 

 

Buy

Hold

Sell

Buy %

2017 performance

Paysafe

9

0

0

100%

58.9%

RPC

9

0

0

100%

(11.3%)

Sophos

9

0

0

100%

117.9%

JD Sports

5

0

0

100%

5.8%

John Laing

5

0

0

100%

8.6%

Diploma

4

0

0

100%

20.0%

Polypipe

4

0

0

100%

21.4%

Savills

4

0

0

100%

41.8%

Elementis

3

0

0

100%

3.9%

NMC Health

3

0

0

100%

86.9%

Total

 

35.4%

FTSE 350

 

8.8%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

However, the most aggressively sold names again confounded the bears, rising faster on average than the FTSE 350 index overall:

 

Buy

Hold

Sell

Buy %

2017 performance

INTU

1

4

10

67%

(10.1%)

Ferrexpo

3

1

7

64%

117.9%

Rolls Royce

2

5

12

63%

28.5%

Metro Bank

2

1

4

57%

22.5%

CYBG

2

5

8

53%

21.1%

Morrison (Wm)

0

8

9

53%

(4.7%)

Royal Bank of Scotland

2

10

13

52%

23.8%

Grafton

5

4

9

50%

45.8%

Millennium & Copthorne

0

2

2

50%

27.1%

Mitie

0

6

6

50%

(20.9%)

Total

 

25.1%

FTSE 350

 

8.8%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

Russ Mould, investment director at AJ Bell, comments:

“Mifid II has shone a bright light on who is paying for analyst research but of equal importance is whether that research is actually adding any value.  The cost of this research will ultimately be borne by customers, whether that is directly or indirectly and a look back at 2017 suggests these ratings needs to be treated with kid gloves, especially when it comes to the FTSE 100.

“Ultimately, what the data does seem to show is the well-informed, diligent, expert broking community has little more idea of what is coming than anyone else, at least in the short term.

“Anyone prepared to pick their own stocks rather than pay a fund manager or index-tracker fund to do it for them must therefore thoroughly research any company for themselves before they even think about buying it shares.

“If this sounds difficult, well, it is but at least investors can follow the lead of successful American investor Charlie Munger – Warren Buffett’s vice-chairman at Berkshire Hathaway – who boils it down to four things:

  • One, do you understand the business?
  • Two, does the business have intrinsic value or durable competitive value?
  • Three, does management have integrity?
  • Four, does the stock come at a reasonable valuation?

“Equally, if an investor likes what they see, they should not be put off just because they are out of step with consensus – they may have unearthed a nugget of value, assuming the stock passes the first three of Munger’s tests. Then they may be heeding Warren Buffett’s maxim that “You can’t buy what is popular and do well.”

Stocks to watch (or avoid) in 2018

Even if following the most aggressively bought names was a flawed strategy in 2017 (at least in the short term), it will be interesting to see how the most popular stocks, based on the current percentage of broker ‘buy’ ratings, fare in 2018, for both the FTSE 100 and the FTSE 350 overall.

FTSE 100

Buy

Hold

Sell

Buy  %

British American Tobacco

16

1

0

94%

Smurfit Kappa

13

0

1

93%

NMC Health

7

1

0

88%

DCC

12

2

0

86%

Ashtead

15

3

0

83%

3i

4

1

0

80%

TUI AG

8

2

0

80%

Shire

19

5

0

79%

Just Eat

15

4

0

79%

Informa

14

4

0

78%

 

 

 

 

 

FTSE 350

Buy

Hold

Sell

Buy  %

Greencore

10

0

0

100%

National Express

8

0

0

100%

Equiniti

6

0

0

100%

Polypipe

6

0

0

100%

888 Holdings

5

0

0

100%

BCA Marketplace

5

0

0

100%

Clarkson

4

0

0

100%

Coats

4

0

0

100%

JD Sports

4

0

0

100%

John Laing

4

0

0

100%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

Equally, natural contrarians may be tempted to look more closely at the stocks that are least popular in the eyes of analysts, as the ten most aggressively sold names outperformed both the FTSE 100 and the FTSE in 2017.

FTSE 100

Buy

Hold

Sell

Sell %

Antofagasta

5

8

12

48%

Marks & Spencer

8

6

12

46%

Rolls Royce

4

6

8

44%

Next

3

9

9

43%

Pearson

5

8

8

38%

Standard Chartered

6

8

8

36%

Hargreaves Lansdown

4

5

5

36%

United Utilities

4

5

5

36%

Burberry

4

13

8

32%

Kingfisher

8

5

6

32%

 

 

 

 

 

FTSE 350

Buy

Hold

Sell

Sell %

Renishaw

1

2

5

63%

Sports Direct

1

1

3

60%

CYBG

1

7

8

50%

Fidessa

1

2

3

50%

PureCircle

1

0

1

50%

Antofagasta

5

8

12

48%

Marks & Spencer

8

6

12

46%

Wetherspoon JD

2

5

6

46%

Metro Bank

2

4

5

45%

Rolls Royce

4

6

8

44%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

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