Retail investors being led astray by analyst ‘buy’ picks

Top UK ‘buys’ have not done any better than the FTSE 100 four years running

AJ Bell has cautioned that retail investors could be led astray by stock picks from leading analysts at investment banks and brokerages, which have consistently missed the mark.

The 10 FTSE 100 stocks that attracted the highest percentage of ‘buy’ ratings last January, like cardboard packager Smurfit Kappa, online takeaway hub Just Eat and multimedia and events group Informa, lost 17.3% on average last year, findings from the platform group revealed. That is five percentage points worse than the FTSE 100 index, which had lost 12.5% by the end of 2018.

British American Tobacco, which 94% of analysts recommended as a ‘buy’, saw over 50% wiped off its share price during the period.

Only one of analysts’ top-10 buy recommendations, Shire, made a positive return (17%), though the report noted this was largely thanks to a takeover bid from Japanese drugs giant Takeda.

                                          Most popular ‘buy’ ratings – January 2018

‘Sell’ recommendations outperform ‘buy’ picks

Embarrassingly analysts’ top picks for the year ahead in 2018 performed worse than the crop of stocks they most actively disliked at the time.

The 10 stocks analysts most frequently advised investors ‘sell’ only lost 10% on average in 2018, beating the top ‘buys’ and the FTSE 100. However as with the ‘buy’ picks only one stock, Hargreaves Lansdown, recorded share price gains.

                                         Most popular ‘sell’ ratings – January 2018

Russ Mould investment director at AJ Bell (pictured) said the forecast misses suggest that analyst research “needs to be treated with kid gloves”.

“2018 proved a tricky year for investors and it wasn’t just retail investors that struggled,” he said. “The research written by analysts at the leading investment banks and broking firms also failed to identify the winners and losers.”

Not an anomaly

The AJ Bell findings from 2018 are not an anomaly, he added. In the four years the group has conducted this analysis, analysts’ combined top picks have not performed any better than the benchmark index in 2015, 2016 or 2017 either.

Mould fears these ratings could be leading retail investors astray.

While he said research published by investment banks and brokers is primarily intended for institutional investors, he said retail investors have also been known to use stock ratings as a way of narrowing down their investment options when looking at a broad-ranging index like the FTSE 100.

“This is not to gratuitously kick the analysts when they are down. But it does suggest that the real value of broking research lies not with the recommendations but with the industry analysis and distillation of the key company issues that it provides,” said Mould.” “It can give retail investors a framework that summarises current market knowledge of a stock, what factors may influence it and (perhaps most importantly, for the short-term at least) consensus forecasts.”

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