Identifying the firms which analysts love and those they hate can be a useful exercise
Thursday 13 Jan 2022 Author: Russ Mould

Every year this column tracks the ratings put on stocks across the FTSE 100 and FTSE 350 by the investment banks which provide research on the UK equity market.

And what catches the eye this year is that the analyst community is the most bullish it has ever been since our first survey back in 2015, based on stock-specific, public recommendations.

As we enter 2022, 57% of all stock ratings are buys and just 9% are sells for constituents of the FTSE 100, the highest and lowest scores over the past eight years. For the FTSE 350 index 59% of all recommendations are positive ratings and just 8% negative ones.

Without endorsing these views, it is worth asking if investors should consider this is a signal to buy more London-traded stocks or actually a warning to cut exposure to UK equities. Momentum players may feel inclined to go with the positive flow. Contrarians may take the opposite view as they bear in mind legendary investor John Templeton’s maxim that ‘bull markets are founded on pessimism, grow on scepticism, mature on optimism and die on euphoria’.

A way to research which path may be the best to follow is to assess the efficacy of individual recommendations.

TRACK AND TRACE

This column has back-tested the performance on the most and least popular stocks at the start of a year, as measured by the percentages of ‘buy’ and ‘sell’ ratings attributed to them by analysts.

The bad news is the analysts’ top picks failed to beat the FTSE 100 index in 2015, 2016, 2017, 2018, 2020 and now 2021, despite all of their diligence.

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 (and this column should know, having been an equity analyst at a leading investment bank from 1993 to 2005).

To further the case for the defence, the degree of underperformance was relatively modest and eight of the 10 most popular names, based on ‘buy’ ratings, provided positive total returns. Better still in 2021, the least popular names in the FTSE 100 did badly. Knowing which names to avoid can be every bit as valuable as knowing which names to buy, if not more so.

Analysts can also take satisfaction from how their labours worked out across the FTSE 350. When it came to the broader index, their 10 most popular names massively outperformed and the least popular 10 stocks massively underperformed. Six of the least-favoured names produced negative total returns even as the FTSE 350 generated a comfortable mid-teens percentage advance, so the research there was spot on.

THE WAY AHEAD

The ultimate conclusion still probably has to be that broker research needs to be treated with a degree of caution (assuming that investors can get their hands on it in the first place).

Anyone prepared to pick their own stocks rather than pay a fund manager or tracker fund to do it for them simply 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, at worst a contrarian indicator, especially given Warren Buffett’s observation that ‘you cannot buy what is popular and do well’.

With that maxim in mind, investors might like to know which stocks are most liked – and disliked – by analysts at the start of 2022. The two 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.

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