Practical analysis for investment professionals
18 November 2020

Maybe Analyst Recommendations Do Add Value

The average analyst does not add value.

This is something all investors know for a fact: Following analyst buy or sell recommendations isn’t going to lead to outperformance in the long run.

Or is it?

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A new study may cast some doubt on the conventional wisdom.

In “Analyst Recommendations and Anomalies Across the Globe,” Vitor Azevedo and Sebastian Müller, CFA, examine 3.8 million analyst forecasts in 45 countries and regions from 1994 to 2019. While the paper has many interesting findings that I will have to come back to some day, its most compelling data points concern analysts’ most-loved and most-hated stocks. Azevedo and Müller compare the top and bottom 20% of equities by consensus analyst recommendations and find that on an equal-weighted basis, US analysts failed to outperform on average. To be sure, this hardly qualifies as a surprise: These findings merely confirm the popular perception. As for why such recommendations don’t work in practice, it may have something to do with the preference among US analysts for growth and glamour stocks.

But these are just US analyst recommendations. What about those from analysts in other markets? It turns out that quite a different picture emerges as soon as the focus shifts outside the United States. In every developed market — and almost all emerging markets — following analyst recommendations actually did lead to meaningful outperformance over time.

In the chart below, I collected the results for only the developed markets included in the study. The United States is a significant outlier.

Analyst Consensus Stock Recommendations: Performance by Market

Chart of Annual Outperformance of most-loved vs. most-hated stocks by market.

So what distinguishes this study from the earlier research that established the common perception that analyst consensus recommendations are useless? Why are the findings so divergent? A key differentiator is that Azevedo and Müller’s data cover two major bear markets: the dot-com crash of the early 2000s and the global financial crisis (GFC) later in the decade. Thus, the study was able to parse whether analyst recommendations work better in bull or bear markets. And as we might have expected, in a low sentiment phase like that of a bear market or financial crisis, analyst recommendations add more performance than in periods of bullish high sentiment.

Cause and effect are hard to differentiate here. Do analysts have deeper insights than most investors and thus are better able to sift through the rubble of a crisis and select the truly good stocks? Or do investors look to analysts for guidance and follow their recommendations more closely during a crisis, and thus turn their buy-and-sell recommendations into something like self-fulfilling prophecies?

Whatever the answer, the study suggests that investors may want to rethink the conventional wisdom on analyst recommendations. They may add some value after all.

For more from Joachim Klement, CFA, don’t miss 7 Mistakes Every Investor Makes (And How to Avoid Them) and Risk Profiling and Tolerance, and sign up for his Klement on Investing commentary.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Maksim Rumiantsev

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About the Author(s)
Joachim Klement, CFA

Joachim Klement, CFA, offers regular commentary at Klement on Investing. Previously, he was CIO at Wellershoff & Partners Ltd., and before that, head of the UBS Wealth Management Strategic Research team and head of equity strategy for UBS Wealth Management. Klement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland, and Madrid, Spain, and graduated with a master’s degree in mathematics. In addition, he holds a master’s degree in economics and finance.

9 thoughts on “Maybe Analyst Recommendations Do Add Value”

  1. Michael Falk says:

    I am very curious about this topic, and would be interested to see how the results might be understood better from the perfect cause-and-effect topic. For example, how are analysts compensated in each of these countries. Might that explain or give us greater insight into the variances across the countries?

    1. Vitor Azevedo says:

      Dear Micheal,
      Thank you very much for the comments. We will try to incorporate it in the paper.

      All the best,

  2. Kirk Cornwell says:

    I would like to see an analysis of the analyst’s favorite self-measure “target price” (usually a moving target). Do they ring a bell (and sell)? Or do they bend their valuation measures and raise the target?
    My experience is that sell recommendations usually are based on diminished prospects, secondarily acknowledging actual changes in indicators.

    1. Hi Kirk,
      Thank you very much for your comment!
      That’s an interesting idea and we will try to implement it.

      All the best!

  3. Tony Frank says:

    The operative word is “Maybe.”

  4. Harshit Bansal says:

    What about emerging markets?

    1. Vitor Azevedo says:

      Hi Harshit,
      In Table 4 of the paper (, we show the risk-adjusted returns of a strategy based on analyst recommendations for emerging markets.

      The results show that the strategy is very profitable. The value-weighted (equally-weighted) risk-adjusted returns are 0.64% (0.53%) per month.

  5. Nikita says:

    Great research!
    Couple of questions:
    1) Could you share how results change over time? Maybe markets in 90s were less efficient than in 00s.
    2) What about single day movement in stock prices when recommendation was announced? For example last week Tesla went up 6% after upgrade from Morgan Stanley. You probably didn’t capture such moves in your research.
    Thank you!

    1. Vitor Azevedo says:

      Dear Nikita,
      Nice comments!

      Regarding your points;
      1) Table 4 of the paper shows two subsamples (1/1994-12/2006 – 1/2007/6/2019). Indeed, in the value-weighted returns, we found a drop in the risk-adjusted returns of following analyst recommendations in the later period.

      2) Our current version focuses on monthly returns, but we consider adding some robustness checks with daily returns.

      All the best!

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