The most and least popular stocks heading into 2020
Although the UK’s stock market underperformed those of Eastern Europe, the US and Western Europe in 2019, in sterling, total-return terms, few investors are likely to sniff at a total return of 19.2% from the FTSE 350 index. The FTSE 250 outpaced the FTSE 100 with a total return of 28.9% against 17.3%.
Better still, the headline indices were relatively calm, especially compared to the wild swings of the fourth quarter of 2018.
Yet for all of the positive headlines and lack of volatility, there was still huge dispersion between the best and worst performing stocks.
Ten members of the FTSE 100 generated a positive total return that exceeded 100% and the top five – Future (FUTR), Pets At Home (PETS), JD Sports (JD.), Galliford Try (GFRD) and Dunelm (DNLM) – offered 125% of more, even though three were retailers and one was a magazine publisher, industries widely perceived to be in distress.
Only 40 of the FTSE 350 generated losses over the year but there were still some nasty accidents. The worst five performers – Pearson (PSON), IP Group (IPO), NMC Health (NMC), Aston Martin (AML) and Tullow Oil (TLW) – all cost investors at least 30% of their investment.
This begs the question of how investors can find winners or avoid portfolio-damaging losers.
Top of the pops
One possible way to narrow down an index as big as the FTSE 350 is to identify which firms are most and least preferred in the research written by analysts at the leading investment banks and broking firms.
Granted, this is primarily intended for institutional investors but websites such as Sharecast and the Broker Forecasts section of Shares’ own website provide a summary of how many analysts cover a stock and how many rate the stock a ‘buy’, ‘hold’ or ‘sell’.
This column has back-tested the performance on the most and least popular stocks at the start of a year for the past several years and its conclusion remains that broker research needs to be treated with a degree of caution.
This is not to poke fun at the analysts. It just shows how hard picking individual stocks can be, even if it is your full-time job.
The good news, from the brokers’ point of view, was that the FTSE 100 stocks with the greatest percentage of ‘buy’ ratings went up and – on average – provided a total return which exceeded that of the index. The bad news was that the stocks with the greatest percentage of ‘sell’ ratings managed the same feat, albeit not quite to the same degree.
The same pattern can be seen across the whole of the FTSE 350, where the stocks that came with the highest percentage of broker ‘buys’ beat the index, so did the names they were keenest to avoid. In fact, the least popular names did better still.
The wisdom of crowds
Some slack can be cut for the beleaguered analysts, since we are still in a bull market, merger and acquisition activity is running hot and 2019 was generally a good year for equities around the globe.
Putting up ‘sell’ ratings is therefore a potentially thankless task and at least the analysts’ combined top picks did beat the index, something that they had failed to do in 2015, 2016, 2017 and 2018.
In that context, it is interesting to note that the broking community is carrying the lowest percentage of ‘buy’ ratings and the highest percentage of ‘sells’ going into 2020 since AJ Bell began this annual survey in 2015, at least so far as the FTSE 100 is concerned.
Make of that what you will, but wilful contrarians may be cheeky enough to think it is a ‘buy’ signal.
The way ahead
This goes to show that anyone prepared to pick their own stocks rather than pay a fund manager or use an index-tracker fund to do it for them must do their own research on individual companies before they even think about buying or selling any of its shares.
At best, broker research may be a useful filter or perhaps a contrarian indicator. With that in mind, investors might like to know which stocks are most liked – and disliked – by analysts at the start of 2020. The tables below list the names which investors may wish to analyse in greater depth, or simply avoid altogether, depending upon their view of the value of the research provided.