Ironically it was the most popular 'sell' rated stocks that beat the index last year, not the 'buy' rated ones
Thursday 14 Jan 2021 Author: Russ Mould

The UK stock market is off to a flier so far as 2021 is concerned. The FTSE 100’s 6.4% gain between Monday 4 and Friday 8 January represented the index’s fastest ever advance over the first five trading days of a new calendar year.

One question to address now is whether this sets the trend for the coming 12 months or whether it is just a case of every dog having its day, after the UK’s terrible showing in 2020, when the FTSE 100 was the worst performer of all of the major developed market indices.

Another is whether it matters all, because investors should never forget that they are dealing with a market of stocks here – the index simply reflects the performance of its underlying constituents, a viewpoint backed up by the huge divergence in returns from the FTSE 100’s constituents in 2020.

Six members the FTSE 100 as of 31 December 2020 generated a positive total return that exceeded 50%, namely Scottish Mortgage (SMT), Pershing Square (PSH), Ocado (OCDO), Fresnillo (FRES), Flutter (FLTR) and Antofagasta (ANTO).

Only two firms in the FTSE 100 at the end of last year generated a negative total return of worse than 50%, namely International Consolidated Airlines (IAG) and Rolls-Royce (RR.). However, Carnival (CCL) was relegated to the FTSE 250 in June and did worse than either of those. Worst of all, NMC Health’s shares were suspended in March as the firm went into administration amid allegations of fraud.

This begs the question of how investors can find winners – or at least avoid portfolio-damaging losers.

PICK OF THE PACK

One possible way is to identify which firms are more 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 Marketscreener 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’).

This column has back-tested the performance on the most 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 (assuming you can get your hands on it in the first place).

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.

Now 2020 was clearly a tricky year and some allowance can be made for how the FTSE 100 stocks with the greatest percentage of ‘buy’ ratings went down. Unfortunately, the news was worse than that as the 10 most popular names did far worse than the index, on a total return basis. It was actually the 10 stocks with the greatest percentage of ‘sell’ ratings which managed to beat the index.

LOOKING FOR THE NEW ACTION

Some slack must be cut for the beleaguered analysts, since 2020 was a fiendishly difficult year. Stocks collapsed in the first half of the year only to rally hard in the second half. In many cases macroeconomic trends, such as the pandemic, recession, and government and central bank policies trumped company-specific developments.

Yet the data show their analysts’ top picks failed to beat the index in in 2015, 2016, 2017, 2018 and now 2020, despite their diligence.

Those investors who are of a contrarian bent may therefore be concerned to see that the broking community is carrying the highest percentage of ‘buy’ ratings on FTSE 100 stocks since AJ Bell began this annual survey back in 2015. Last week’s quickfire gains at least mean that the analysts are off to a good start in 2021.

THE WAY AHEAD

Anyone prepared to pick their own stocks rather than pay a fund manager or 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 their shares.

At best, broker research may be a useful filter or a cheeky contrarian indicator which only confirms legendary investor Warren Buffett’s old maxim that ‘you cannot buy what is popular and do well’.

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 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.

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