Do brokers pick the winners?

When it comes to stock picking there are many different styles and ways of selecting the individual shares which investors feel best suit their overall strategy, target returns, time horizon and appetite for risk (assuming they feel confident enough to do this in the first place, rather than leave the job to a fund manager).

Momentum is one, where the investor decides the trend will be their friend, either on the basis that the share price is going up, forecast earnings and dividends are going up, actual profits and shareholder payouts are going up or a combination of all three. Here, valuation will be a consideration in most cases, not all, and potentially a minor one at that.

By contrast, value investors seek to poke around in the market’s darker recesses, looking for unloved, misunderstood and potentially undervalued companies where a change of some kind – management, strategy, cost-cutting, a disposal or a refinancing, for example – can spark a change in fortunes.

The momentum investor may be content to run with the market herd while the value seeker will almost intentionally go in the opposite direction. This begs the question of how to spot which stocks suit which particular style.

One way of spotting which stocks may have momentum and which do not (and could therefore be value opportunities) is to look at broking research. Granted, this is primarily intended for institutional investors but websites such as www.brokerforecasts.com and www.digitallook.com provide a summary of how many analysts cover a stock and how many rate the stock a ‘buy’ or a ‘sell’ (or are sat on the fence with a ‘hold’).

For the third year in a row, AJ Bell has analysed the FTSE 350 to see which stocks are the most – and least – popular with the brokers, to see if this could provide any pointers for the year ahead. We have also back-tested the data to see whether the most widely liked stocks (those with the most ‘buys’ or highest percentage of ‘buy’ ratings) have done well and those that seem least popular (those with the most ‘sells’ or highest percentage of ‘sell’ ratings) have done badly.

You may be surprised by the answers.

Back to the future

In January 2015, this column set out to look at which stocks were the most popular with the professional analysts, to see whether this helped identify potential portfolio winners.

Rather than just look at the crude measure of the number of analysts covering a company, we looked at how a firm’s market cap compared to the size of the crowd who were following it. After all, a big, complex company like HSBC, with a huge market cap, is always going to attract more coverage than a one-division company worth a few hundred million.

This analysis comprehensively suggested that the trend was not the investors’ friend in 2015, at least so far as the FTSE 350 (excluding investment trusts) was concerned.

Of 10 firms which had the lowest amount of market cap per analysts recommendation – in other words those which were most intensively covered and by implication most popular with the brokers – only one managed to generate a share price increase in 2015, the gold miner Centamin. The other nine all fell and between them the ten generated an average share price fall of 34.5%, way worse than the 2.5% decline offered by the FTSE All-Share over the same time period.

Most popular stocks with brokers performed horribly in 2015

Market cap £m Number of analyst recommendations Market cap per analyst £m Broker Ratings 2015 performance
Buy Hold Sell
1 Afren 505.16 24 21 9 12 3 -96.2%
2 Premier Oil 841.31 23 37 16 7 0 -71.0%
3 Ophir Energy 835.81 20 42 8 10 2 -30.4%
4 Centamin 699.91 16 44 10 4 2 9.3%
5 Debenhams 925.99 21 44 4 13 4 -2.0%
6 Cairn Energy 1044.19 23 45 14 9 0 -11.7%
7 Acacia Mining 1072.78 21 51 11 8 2 -26.8%
8 Halfords 927.44 18 52 8 7 3 -28.6%
9 KAZ Minerals 1164.29 22 53 4 15 3 -60.3%
10 Serco 856.85 16 54 0 10 6 -27.4%
TOTAL 84 95 25 -34.5%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

The most over-broked stock of all, Afren, began the year with 24 analysts covering it, for just £21 million of market cap per rating – and only three of those 24 were sellers of company whose shares fell 96% in 2015 before they were suspended owing to Afren’s financial difficulties. The most intensively covered-stock, was, believe it or not the very worst single performer in the FTSE 350 last year.

That says a lot about the dangers posed by a company that has a lot of debt and whose profits are very sensitive to sudden swings in price changes in its core product – in this case, oil.

But it doesn’t say much for the quality of a lot of broking research and here the investor must be careful. No analyst wants to get something wrong and it’s no fun doing so, especially in print (and I should know as I did the job for 12 years at UBS investment bank, covering technology stocks in the UK and Europe). But the investor must be aware that analysts could be banging the drum in the in the hope they can generate commission, either from share trading or, more likely, corporate activity such as new listings, secondary offerings of paper and merger and acquisition activity.

Even if such cynicism is misplaced, the experiences of 2015 suggested that following the most over-broked stocks potentially meant investors ended up buying the most over-hyped stocks as they embarked upon a quick trip to the poor house.

Eat, sleep, invest, repeat

Emboldened by such a find, this column embarked upon the same process 12 months ago, to identify the FTSE 350 stocks which had the lowest amount of market cap per analyst and thus were the most potentially overbroked and overhyped.

In fairness to the analysts’ this time, the results were better. Nine of the ten most heavily broked stocks rose (although the only exception was the most intensively covered name of all) and they racked up an average gain of 41.3% between them.

Now that is much more like it – contrarians appear to have emerged unscathed from 2015 but on the face of it momentum ran them right over in 2016.

Most popular stocks with brokers performed much better in 2016

Market cap £m Number of analyst recommendations Market cap per analyst £m Broker Ratings 2016 performance
Buy Hold Sell
1 Ophir Energy 557 23 24 10 11 2 -2.0%
2 Acacia Mining 720.1 25 29 15 8 2 107.6%
3 Cairn Energy 742 23 32 13 7 3 49.6%
4 Poundland 404 12 34 8 4 0 8.3%
5 Tullow Oil 1157 28 41 16 8 4 88.7%
6 Wetherspoon JD 728 17 43 3 5 9 18.6%
7 Halfords 729 17 43 6 9 2 9.0%
8 Morgan Advanced Materials 570 13 44 5 5 3 15.4%
9 Centamin 712 15 47 10 4 1 115.1%
10 Aldermore 672 13 52 4 8 1 2.3%
TOTAL 90 69 27 41.3%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

What does muddy the waters slightly is that in both years oil and mining stocks were particularly prevalent in the lists of most-intensively covered (over-broked?) stocks. Both sectors collapsed in 2015 as commodity prices sagged and growth fears gathered and both rallied hard in 2016, as raw materials prices surged and the market embraced the Trump/reflation trade.

Further test

To further probe the validity of the exercise, we have therefore dug deeper into the numbers for 2016 and gone beyond just market cap per analyst.

  • We have looked at the stocks with the highest percentage of buy ratings and the smallest amount of market cap per ‘buy’ call, to see if this helps spot winners to buy (or overhyped stocks to avoid)
  • For good measure, we have also looked at the least popular stocks, those with the highest percentage of ‘sell’ ratings and the smallest amount of market caps per ‘sell’ calls to see if this helps to identify worthy contrarian picks (or those that are falling knives to also be avoided).

This adds four more tests – and in three cases, doing the opposite to the analysts (and by implication the opposite to the prevailing market wisdom or consensus) would have better served the investor.

First of all, the ten stocks with the lowest percentage of ‘buy’ ratings beat the ten stocks with the highest percentage of ‘buy’ ratings hands down. Contrarians 1, Momentum 0.

The least popular FTSE 350 stocks with brokers outperformed those rated most positively in 2016

Broker ratings   2016 performance
Buy Hold Sell % Buys
1 Vectura 5 0 0 100% -22.1%
2 Dixons Carphone 3 0 0 100% -29.1%
3 Aviva 2 0 0 100% -5.7%
4 Prudential 6 0 0 100% 6.3%
5 Ashtead 8 0 0 100% 41.2%
6 GKN 5 0 0 100% 7.6%
7 3i 3 0 0 100% 46.2%
8 TUI AG 3 0 0 100% -4.0%
9 Land Securities 1 0 0 100% -9.4%
10 Experian 5 0 0 100% 31.1%
TOTAL 41 0 0 6.2%
291 Standard Life 2 12 4 11% -4.5%
292 Amlin 1 8 0 11% 0.8%
293 Electrocomponents 1 4 6 9% 100.0%
294 INTU 1 8 3 8% -11.3%
295 Aggreko 1 8 3 8% 0.4%
296 Hargreaves Lansdown 1 10 3 7% -19.5%
297 Evraz 1 6 7 7% 202.8%
298 Rotork 1 11 8 5% 32.0%
299 Persimmon 0 5 3 0% -12.4%
300 Coca-Cola HBC 0 8 8 0% 22.2%
TOTAL 9 80 45 31.1%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

Secondly, the ten stocks in the FTSE 350 with the highest percentage of ‘sell’ ratings easily did better than the ten with the lowest percentage of ‘sell’ ratings. In the case of the latter, there was not one broker between them who called a ‘sell’ yet six of the ten did just that and between them they generated an aggregate loss, against the 57.6% gain for the ten stocks analysts were most keen to avoid last year. Contrarians 2, Momentum 0.

The most disliked FTSE 350 stocks with brokers outperformed those most widely liked in 2016

Broker ratings 2016 performance
Buy  Hold Sell % Sells
1 Electrocomponents 1 4 6 55% 100.0%
2 Wetherspoon JD 3 5 9 53% 18.6%
3 Coca-Cola HBC 0 8 8 50% 22.2%
4 Evraz 1 6 7 50% 202.8%
5 Vedanta Resources 2 3 4 44% 219.6%
6 Rotork 1 11 8 40% 32.0%
7 Morrison (Wm) 4 9 8 38% 55.7%
8 Persimmon 0 5 3 38% -12.4%
9 International Personal Finance 5 0 3 38% -40.4%
10 TalkTalk Telecom 5 7 7 37% -22.2%
TOTAL 22 58 63 57.6%
291 Synthomer 6 6 0 0% 20.3%
292 Ted Baker 5 1 0 0% -5.8%
293 Telecom Plus 3 0 0 0% 9.8%
294 Tritax Big Box REIT 1 1 0 0% 8.8%
295 UDG Healthcare 4 1 0 0% 12.2%
296 Ultra Electronics 3 4 0 0% -1.8%
297 Vectura 5 0 0 0% -22.1%
298 Virgin Money 9 3 0 0% -20.5%
299 Wizz Air 6 3 0 0% -1.4%
300 Workspace 10 2 0 0% -17.4%
TOTAL 52 21 0 -1.8%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

Here it then looks like the analysts are rallying. The ten stocks with the lowest amount of market cap per ‘buy’ rating – where there were loads of analysts and they were very positive – did better than those that were intensively covered and ‘buy’ ratings were harder to come by. Contrarians 2, Momentum 1.

The stocks with the least market cap per ‘buy’ rating (and thus maybe the most popular stocks of all) did do well in 2016

Market cap £m Buy  Hold Sell Buy rating per £m market cap 2016 performance
1 Acacia Mining 720.1 15 8 2 48 107.7%
2 Poundland 404 8 4 0 51 8.3%
3 Ophir Energy 557 10 11 2 56 -2.0%
4 Cairn Energy 742 13 7 3 57 49.6%
5 Centamin 712 10 4 1 71 115.1%
6 Tullow Oil 1157 16 8 4 72 88.7%
7 Northgate 450 6 0 1 75 25.3%
8 Bodycote 994 12 2 1 83 13.3%
9 Senior 854 10 3 0 85 -15.4%
10 Paragon 883 9 3 1 98 17.3%
TOTAL 109 50 15 40.8%
291 BP 62417 13 21 2 4,801 44.0%
292 British American Tobacco 66722 11 7 1 6,066 22.6%
293 Hargreaves Lansdown 6072 1 10 3 6,072 -19.5%
294 Royal Bank of Scotland 30381 5 17 2 6,076 -25.6%
295 National Grid 34906 5 10 2 6,981 1.5%
296 SABMiller 66478 8 14 0 8,310 10.6%
297 HSBC 91959 9 12 1 10,218 22.5%
298 GlaxoSmithKline 66533 5 21 4 13,307 13.8%
299 Persimmon 5824 0 5 3 n/a 22.7%
300 Coca-Cola HBC 4993 0 8 8 n/a 22.2%
TOTAL 57 125 26 11.5%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

However, the good news begins and ends there for the analysts and the market consensus. The stocks with the lowest amount of market cap per ‘sell’ rating – where there were loads of analysts and they generally hated the stock – did much better where there was a lot of coverage but a relatively light smattering of bearish comment. Contrarians 3, Momentum 1.

The FTSE 350 stocks with the most aggressively negative broker coverage in still produced healthy gains on average in 2016

FTSE 350 market cap per sell Market cap £m Buy  Hold Sell Sell rating per £m market cap 2016 performance
1 Wetherspoon JD 728 3 5 9 81 18.6%
2 Evraz 883 1 6 7 126 202.8%
3 Vedanta Resources 592 2 3 4 148 219.6%
4 Electrocomponents 918 1 4 6 153 100.0%
5 Rotork 1401 1 11 8 175 32.0%
6 International Personal Finance 535 5 0 3 178 -40.4%
7 Drax 904 5 5 5 181 54.6%
8 Debenhams 944 4 7 5 189 -21.8%
9 Morgan Advanced Materials 570 5 5 3 190 15.4%
10 Marston's 826 5 5 4 207 -18.3%
TOTAL 32 51 54 56.3%
291 Bunzl 5843 5 7 0 n/a 11.9%
292 Worldpay 5998 5 3 0 n/a -12.2%
293 Fresnillo  4878 4 10 0 n/a 72.5%
294 Schroders 7962 6 10 0 n/a 0.7%
295 London Stock Exchange 8310 6 5 0 n/a 4.5%
296 Rexam 4236 3 5 0 n/a 6.7%
297 Shire 24254 16 6 0 n/a -0.3%
298 Balfour Beatty 1635 1 2 0 n/a -0.5%
299 Amlin 3344 1 8 0 n/a 0.8%
300 SABMiller 66478 8 14 0 n/a 10.6%
TOTAL 55 70 0 9.5%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

Do your own research

This leads onto the inevitable question: namely, which stocks are most liked and disliked by brokers as we enter 2017?

Before the drum roll and unveiling of the names, based on our criteria of analyst per market cap, percentage of ‘buy’ and ‘sell’ ratings, and market cap per ‘buy‘ and ‘sell’ rating, it is worth bearing the following in mind:

  • On the face of it, doing the opposite to the consensus/majority broker view served investors better overall in 2015 and 2016, to show the dangers of following the herd.
  • That said, the most intensively covered names with the highest percentage of ‘buys’ did do well, to suggest the trend can be investors’ friend.
  • The temptation to simply blindly do the opposite to the consensus should therefore be resisted, because the past is no guide to the future and because if making money in the markets was simple every one would already be doing it.
  • The data above is based on two individual years. Yet the real power of equity investing (which comes particularly through the harvesting and reinvestment of dividends) is felt over periods of a decade, two decades or more. 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. And if they haven’t got a clue when it comes to trying to time the market, it does suggest that private investors should only try it if they are only too aware of the dangers and are willing to suffer and able to financial withstand losses in their quest for momentum-fuelled portfolio gains.

Ultimately, anyone prepared to pick their own stocks rather than pay a fund manager to do it for them must thoroughly research any company for themselves before they even think about buying it shares. If this sounds difficult, well, it is but at least you 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?

In other words, if you don’t understand the business, aren’t sure the company has pricing power, don’t trust the management or fear the shares are expensive, you may need to think again.

And even if the stock passes the first three tests, valuation remains a key hurdle. What could be argued here is that if a stock has done well, lots of brokers are covering it and the bulk of them are buyers of the stock, you need to have a very good reason to buy it, if the experiences of 2015 and 2016 are any guide.

As well-known American investor, commentator and businessman Jim Rogers once put it: “The more certain something is, the less likely it is to be profitable.” (Or, in other words, if the investment case is that blindingly obvious it is likely the market priced it in a long time ago).

Equally, if you like what you see, you shouldn’t be put off just because you are out of step with consensus – this means you may have unearthed a value nugget, assuming the stock passes the first three tests. Then you may be following Warren Buffett’s maxim that “You can’t buy what is popular and do well.”

Acid test

This is the third year of our analysis of overbroked (and potentially overloved, overvalued) stocks and underbroked (and potentially unloved, undervalued) stocks. These are the lists to which we shall return in a year’s time to see how they have done.

This list is simply the most intensively covered names within the FTSE 350, those with the least market cap per analyst recommendation, and then those which seem to draw the scantiest degree of analysts’ attention. It will be interesting to see which one does best in 2017.

The FTSE 350 stocks with the most coverage (and least market cap per recommendation) entering 2017

Market cap £m Number of analyst recommendations Market cap per analyst recommendation (£m) Broker Ratings
Buy Hold Sell
1 Debenhams 640 16 40 1 10 5
2 SIG 592 14 42 1 11 2
3 Halfords 687 16 43 4 7 5
4 Restaurant Group 659 15 44 5 7 3
5 Aldermore 815 15 54 8 7 0
6 Shawbrook 681 12 57 6 5 1
7 Petra Diamonds 853 15 57 11 4 0
8 Barr AG 586 10 59 3 5 2
9 Nostrum Oil & Gas 723 12 60 5 7 0
10 Marston's 769 12 64 6 3 3


Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

This next list shows the names which have the highest and lowest percentage of ‘buy’ ratings. In theory the top half should beat the bottom half – but the opposite happened in 2016.

The FTSE 350 stocks with the most (and least) upbeat broker coverage at the start of 2017

Buy  Hold Sell Buy %
1 Paysafe 9 0 0 100%
2 RPC 9 0 0 100%
3 Sophos 9 0 0 100%
4 JD Sports 5 0 0 100%
5 John Laing 5 0 0 100%
6 Diploma 4 0 0 100%
7 Polypipe 4 0 0 100%
8 Savills 4 0 0 100%
9 Elementis 3 0 0 100%
10 NMC Health 3 0 0 100%
287 Debenhams 1 10 5 6%
288 Ashmore 1 8 8 6%
289 Capita  1 16 3 5%
290 CMC Markets 0 4 1 0%
291 Mitie 0 6 6 0%
292 Assura 0 3 0 0%
293 Dignity 0 3 0 0%
294 Millennium & Copthorne 0 2 2 0%
295 Aberdeen Asset Management 0 10 9 0%
296 Morrison (Wm) 0 8 9 0%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

This third list outlines the FTSE 350 names which have the highest and lowest percentage of ‘sell’ ratings. In theory the top half should do badly and the bottom half well - except the opposite happened in 2016.

The FTSE 350 stocks with the most and least negative broker coverage entering 2017

Buy  Hold Sell Sell %
1 INTU 1 4 10 67%
2 Ferrexpo 3 1 7 64%
3 Rolls Royce 2 5 12 63%
4 Metro Bank 2 1 4 57%
5 CYBG 2 5 8 53%
6 Morrison (Wm) 0 8 9 53%
7 Royal Bank of Scotland 2 10 13 52%
8 Grafton 5 4 9 50%
9 Millennium & Copthorne 0 2 2 50%
10 Mitie 0 6 6 50%
287 3i 5 2 0 0%
288 Paddy Power Betfair 13 3 0 0%
289 ITV 14 9 0 0%
290 London Stock Exchange 4 5 0 0%
291 Smith & Nephew 7 7 0 0%
292 RELX 10 7 0 0%
293 Associated British Foods 10 13 0 0%
294 Carnival 4 6 0 0%
295 Shire 25 4 0 0%
296 Reckitt Benckiser 12 11 0 0%

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

The fourth batch highlights those with the lowest market cap per ‘buy’ rating and the highest amount – if the consensus broker view is correct, the top half should do well and the bottom half badly in 2017. This is how events unfolded in 2016.

The FTSE 350 stocks with the most (and least) uniformly positive broker coverage, based on market cap per ‘buy’ rating

Market cap £m Buy  Hold Sell Buy rating per market cap £m
1 Petra Diamonds 853 11 4 0 78
2 Wizz Air 1,029 12 1 1 86
3 Bodycote 1,240 14 2 0 89
4 Ibstock 748 8 1 0 94
5 Cairn Energy 1,378 14 4 2 98
6 Aldermore 815 8 7 0 102
7 Shawbrook 681 6 5 1 114
8 Vectura 941 8 2 0 118
9 Go-Ahead 970 8 3 0 121
10 Virgin Money 1,404 11 4 1 128
287 BP 100,502 13 20 1 7,731
288 Royal Bank of Scotland 27,501 2 10 13 13,751
289 HSBC 132,485 4 15 1 33,121
290 CMC Markets 340 0 4 1 n/a
291 Mitie 798 0 6 6 n/a
292 Assura 942 0 3 0 n/a
293 Dignity 1,214 0 3 0 n/a
294 Millennium & Copthorne 1,481 0 2 2 n/a
295 Aberdeen Asset Management 3,581 0 10 9 n/a
296 Morrison (Wm) 5,404 0 8 9 n/a

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

The fifth and final list looks at those FTSE 350 stocks which have the lowest amount of market cap per ‘sell’ rating and the highest amount. If the analysts are right, the top half should do badly and the bottom half do well, although they were wrong in 2016.

The FTSE 350 stocks with the most (and least) uniformly negative broker coverage, based on market cap per ‘buy’ rating

Market cap £m Buy  Hold Sell Sell rating per market cap £m
1 Ferrexpo 762 3 1 7 109
2 Debenhams 640 1 10 5 128
3 Mitie 798 0 6 6 133
4 Halfords 687 4 7 5 137
5 Grafton 1,308 5 4 9 145
6 Wetherspoon JD 976 4 3 6 163
7 Lancashire 1,396 2 8 8 175
8 Restaurant Group 659 5 7 3 220
9 TalkTalk Telecom 1,587 5 5 7 227
10 Ashmore 2,019 1 8 8 252
287 3i 6,960 5 2 0 n/a
288 Paddy Power Betfair 7,335 13 3 0 n/a
289 ITV 8,002 14 9 0 n/a
290 London Stock Exchange 10,152 4 5 0 n/a
291 Smith & Nephew 10,589 7 7 0 n/a
292 RELX 15,618 10 7 0 n/a
293 Associated British Foods 20,726 10 13 0 n/a
294 Carnival 30,833 4 6 0 n/a
295 Shire 43,366 25 4 0 n/a
296 Reckitt Benckiser 47,451 12 11 0 n/a

Source: Digital Look, Broker Forecasts, Thomson Reuters Datastream

Russ Mould, AJ Bell Investment Director