Highest rated stocks underperformed the market in 2018

Russ Mould
23 January 2019

•        The ten FTSE 100 stocks that analysts most often rated a ‘buy’ lost an average 17.3% in 2018 compared to the index loss of 12.5%
•        Only one of the top ten (Shire) made a positive return
•        The ten FTSE 100 stocks that analysts most often rated a ‘sell’ performed better with an average loss of 10.1%
•        Analyst ratings for 2019 revealed

Russ Mould, investment director at AJ Bell, comments:

“2018 proved a tricky year for investors and it wasn’t just retail investors that struggled.  The research written by analysts at the leading investment banks and broking firms also failed to identify the winners and losers.  

“Granted, this is primarily intended for institutional investors but it is possible to find a summary of how many analysts cover a stock and how many rate the stock a buy, sell or hold and this can be a way for retail investors to at least narrow down an index as broad-ranging as the FTSE 100. 

“However, a back-test of the data on the most and least popular stocks at the start of 2018 suggests that this research needs to be treated with kid gloves.

“As if to reinforce US investor Jim Rogers’ view that ‘The more certain something is, the less likely it is to be profitable’, the ten FTSE 100 firms which last January attracted the highest percentage of ‘buy’ ratings among the analysts did even worse than the 12.5% capital loss generated by the index overall in calendar 2018. Just one of the ten rose in value and that was Shire, thanks to a bid from Japan’s Takeda.

 

Buy

Hold

Sell

Buy %

2018 performance

British American Tobacco

16

1

0

94%

(50.2%)

Smurfit Kappa

13

0

1

93%

(17.0%)

NMC Health

7

1

0

88%

(5.2%)

DCC

12

2

0

86%

(19.8%)

Ashtead

15

3

0

83%

(17.8%)

3i

4

1

0

80%

(15.3%)

TUI AG

8

2

0

80%

(26.9%)

Shire

19

5

0

79%

17.2%

Just Eat

15

4

0

79%

(24.9%)

Informa

14

4

0

78%

(12.7%)

TOTAL

 

 

 

 

(17.3%)

FTSE 100

 

 

 

 

(12.5%)

Source: Webfg, Broker Forecasts, Refinitiv data

“To cap it off, the stocks which analysts most actively disliked, as evidenced by the number of ‘sell’ ratings, did marginally less badly than the FTSE 100, although in fairness only one recorded actual share price gains. 

 

Buy

Hold

Sell

Sell %

2018 performance

Antofagasta

5

8

12

48%

(22.1%)

Marks & Spencer

8

6

12

46%

(21.5%)

Rolls Royce

4

6

8

44%

(0.6%)

Next

3

9

9

43%

(11.8%)

Pearson

5

8

8

38%

27.5%

Standard Chartered

6

8

8

36%

(21.9%)

Hargreaves Lansdown

4

5

5

36%

2.6%

United Utilities

4

5

5

36%

(11.2%)

Burberry

4

13

8

32%

(3.2%)

Kingfisher

8

5

6

32%

(38.6%)

TOTAL

 

 

 

 

(10.1%)

FTSE 100

 

 

 

 

(12.5%)

Source: Webfg, Broker Forecasts, Refinitiv data

“While it is tempting to cut analysts some slack by noting that 2018 was a tough year, this is the fourth time we have conducted this analysis -  and the analysts’ combined top picks fared no better than the benchmark index in 2015, 2016 or 2017.

“This is not to gratuitously kick the analysts when they are down. But it does suggest that the real value of broking research lies not with the recommendations but with the industry analysis and distillation of the key company issues that it provides.  It can give retail investors a framework that summarises current market knowledge of a stock, what factors may influence it and (perhaps most importantly, for the short-term at least) consensus forecasts.

“With this year in mind, the two tables below show which stocks are most liked – and disliked - by analysts for 2019. 

FTSE stocks with the highest percentage of ‘buy’ ratings from analysts at the start of 2019

 

 

 

 

% ‘Buy’ ratings

DCC

13

1

0

93%

Informa

11

1

0

92%

Melrose Industries

10

1

0

91%

NMC Health

8

0

1

89%

GVC

13

2

0

87%

Mondi

12

2

0

86%

SEGRO

12

1

1

86%

Glencore

21

4

0

84%

3i

4

1

0

80%

St. James's Place

12

3

0

80%

Source: Webfg, Broker Forecasts

FTSE stocks with the highest percentage of ‘sell’ ratings from analysts at the start of 2019

 

 

 

 

% ‘Sell’ ratings

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%

Source: Webfg, Broker Forecasts

“Whether investors decide to do further research on these names – or avoid them like the plague – may depend upon their view of the value of the analysis provided.

“But anyone prepared to pick their own stocks rather than pay a fund manager or index-tracker fund to do it for them must still 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’.”

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