How is being a stock investor better than being a gambler

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Reference no: EM131985472

The smart money has been awfully dumb lately. Investors pay Wall Street analysts to sort through a maze of financial data and determine which stocks are set to soar and which ones to avoid.

Yet the stocks analysts have lavished praised on -- by telling clients to buy them -- have tanked since early March, while the companies these experts snubbed have popped. "Owning the most loved stocks has been a losing trade in the current market environment," Bespoke Investment Group wrote in a recent report.

According to Bespoke, the 50 stocks in the S&P 500 that have the most positive analyst ratings dropped an average of 2.4% in the two months since the Nasdaq peaked on March 5. During that same span, the 50 stocks saddled with the most negative analyst ratings enjoyed a solid 3.5% gain. Those numbers illustrate how confusing recent market action has been for all investors, even the professionals.

They also highlight the recent shift away from winning momentum stocks in the Internet and biotech sectors in favor of "boring" value plays like consumer staples and utilities. Related: Top 20 stable stocks to buy now "With the benefit of hindsight, it's clear we are paying the price this year for the tremendous gains of last year," said Ed Yardeni, president of investment advisory Yardeni Research.

A prime example of Wall Street's faulty forecasting is Facebook (FB, Fortune 500). Mark Zuckerberg's company has tumbled about 17% since March 5 even though analysts have showered 44 buy ratings on the stock, compared with just nine hold ratings and zero sell calls, according to Bespoke. Likewise, Priceline.com (PCLN, Fortune 500) shares are down 17% since the Nasdaq peak despite rosy predictions from analysts.

Almost 90% of analysts covering the online travel site have buy ratings on the stock and their consensus price target of $1,451 is around 20% higher than where shares are currently trading. Other S&P 500 stocks that belong to this "bullish rating, bearish performance" story include CBS (CBS, Fortune 500), Express Scripts (ESRX, Fortune 500), Cardinal Health (CAH, Fortune 500) and Newell Rubbermaid (NWL, Fortune 500). Of course, analysts have long been seen as an overly optimistic group (see: dotcom bubble, Enron scandal, 2008 financial crisis). "As a general rule, analysts tend to love the companies they follow," said Yardeni.

"That's the nature of the beast. Why would you want to follow a stock you had no confidence will exist in the future?" Sometimes analyst price targets are influenced by the momentum of the market and move higher. "If they are seeing the stocks they are following going up a lot, they do have a tendency to reverse engineer the numbers," said Yardeni.

Related: Are stocks overpriced? On the other hand, analysts continued to express pessimistic views on a slew of value stocks that have helped carry the S&P 500 to all-time highs in recent days.

Take Diamond Offshore (DO), for example. The deepwater drilling contractor is up 10% since March 5 even though just 5% of analysts are bullish on the stock. Wall Street's consensus price target of $45.44 on Diamond Offshore is 12% below its recent close. Household names Deere (DE, Fortune 500) and Campbell Soup (CPB, Fortune 500) have also rallied in 2014 despite receiving little to no love from Wall Street analysts.

There are a number of other energy and utility stocks in this category, including AGL Resources (GAS), Entergy (ETR, Fortune 500), Pepco Holdings (POM, Fortune 500), Exelon (EXC, Fortune 500) and Windstream Holdings (WIN, Fortune 500). Lured by their attractive dividend yields, investors have raced into utilities in recent months. These stocks have benefited from the fact that bond yields, contrary to popular belief, have dipped instead of spiking this year.

Yet utilities aren't covered much by analysts, and some high growth funds don't even include them in their universe of investable assets. "Those types of names are not as loved by analysts as the shinier tech or consumer discretionary names," said Justin Walters, co-founder of Bespoke. Walters said it's important for investors to do their homework on stocks -- as well as analysts.

In other words, before blindly following the advice of a single analyst, check to see his or her track record on a given stock. Also, keep in mind how many analysts are bullish or bearish on a stock. If everyone is already bullish, the time to buy may have already passed.

How is being a stock investor better than being a gambler at casinos, the race tracks, or buying lottery tickets?

When investing to accumulate a retirement nest egg, do you prefer a 401(K), 403(B), or IRA to a taxable investment account? Why?

Reference no: EM131985472

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