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Dispersion

We look into what analyst ratings really mean for stock prices.

In no other arena can the everyday person compete alongside industry titans. Markets provide a chance for any investor to buy and sell the same stocks as Buffett or Dalio while aiming for the same goal; outperforming the benchmark.

While the pros are at an advantage given they can spend a full work week looking at stocks, that doesn’t mean we can’t benefit from their labour. Armies of analysts from the biggest investment houses on the planet publish regular research with their ratings and price targets on stocks.

Research suggests that analyst price targets in isolation aren’t so useful, but when analysed collectively can reveal a lot about a stock’s potential movements. A study from Yale and Indiana University looked at 465,797 price targets over a 20 year period.

They found that stocks with low dispersion in price targets exhibited a strong propensity to reach such price targets. For example, if many analysts have price targets within 10% of each other, the stock is more likely to reach that price than a stock with a wide array of price targets. In fact, as the dispersion between price targets increases, stocks are actually more likely to have negative returns.

Not all analysts are created equal either. The same paper suggests the analysts in the top quartile of selections outperform those in the bottom quartile by about 1.2% per quarter. So which analysts are worth listening to?

Just as the NBA or NFL have their All-Star or All-Pro honours to honour the best in the game, Institutional Investor has created the All-American Research Team to recognise the best analysts in every sector. Up to its 50th installment, they have even put together a Hall of Fame for those analysts who have topped their sector more than 10 times.

Apart from being another resume accolade for Wall St’s elite, there are some incredible lessons each of the AART members share. For example, Bank of America’s best alternative energy analyst reminds us that so often, renewable energy stocks are driven by the macro environment as much as an individual stock’s situation. As good as a company’s model or technology may be, things like regulation or legislation can often matter more in the short run. Read more  insights from the HoF here.

Also, a reminder that all Stake Black subscribers get access to analyst ratings and price targets all directly available through our app and site.


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