Analyst Recommendation and Stock Performance: Long-Term Study (Pt. 1)

Studies show that stock analysts often issue buy recommendations while sell recommendations are given in a lesser amount.
The significance of these buy/sell advices for an investor is disputed in literature (f.e. BJERRING/LAKONISHOK/VERMAELEN 1983). At least for downgrades some studies show abnormal negative returns for a short period of time (f.e. MARTINEZ 2010 for Brasil 1995-2003, Belcredi/Bozzi/Rigamonti 2003 for Italy 1998-2003). Interestingly Belcredi et. al show that abnormal returns are already present prior to the release of the analysts report.

Thinking that the idea of a basket of the worst rated stocks might be interesting, i decided to create my own long-term study on analyst recommendations.
I chose 12 of the worst/best rated stocks by different analysts and will compare the performance monthly.
The individual stocks wont get updated, f.e. if they receive a different recommendation (downgrade, etc.). This way the basket stays fixed and i can focus on the development of the stocks after the recommendations.

Now let me introduce my BEST-Basket:

• Andritz AG Inhaber-Aktien o.N.
• CeWe Color Holding AG Inhaber-Aktien o.N.
• Check Point Software Techs Ltd Registered Shares IS -,01
• Goldcorp Inc. Registered Shares Vtg o.N.
• Gran Tierra Energy Inc. Registered Shares DL -,001
• Las Vegas Sands Corp. Registered Shares DL -,001
• Lynas Corp. Ltd. Registered Shares o.N.
• Nuance Communications Inc. Registered Shares DL -,001
• QUALCOMM Inc. Registered Shares DL -,0001
• Schlumberger N.V. (Ltd.) New York Reg. Shares DL -,01
• TJX Companies Inc. Registered Shares DL 1
• Valéo S.A. Actions Port. EO 3

And my WORST-BASKET:

• Akzo Nobel N.V. Aandelen aan toonder EO 2
• centrotherm photovoltaics AG Inhaber-Aktien o.N.
• Commerzbank AG Inhaber-Aktien o.N.
• CRH PLC Registered Shares EO -,32
• Dendreon Corp. Registered Shares DL -,001
• First Solar Inc. Registered Shares DL -,001
• Gagfah S.A. Actions nom. EO 1,25
• Kon. KPN N.V. Aandelen aan toonder EO -,24
• Lilly & Co., Eli Registered Shares o.N.
• Novo-Nordisk AS Navne-Aktier B DK 1
• Randgold Resources Ltd. Reg. Shares (ADRs) DL -,05
• Sprint Nextel Corp. Reg. Shares FON Sr. 1 DL 2,-

The performance of the first month was the following:

• Total Best 12 Basket                                                367,52       0,8%     374,22
• Total Worst 12 Basket                                              328,45       6,6%     343,47
• DAX 30 Perf Index                                                  6.754,46    3,2%     6.970,79
• Dow Jones Industrial Average Index (Price) (USD)         12.878,88  1,6%     13.090,84

From 01.08.2012 until the 01.09.2012 the Worst 12 over performed the market as well as the Best 12 basket very very clearly. However this is due to the fact that the two photovoltaik stocks had each returns of around 30%, without them the performance would have been significantly lower at 3,5%, however still over market and best-basket!

Personally i find this interesting, however statistical not significance due to the very limited time period and samples.

I will continue to update the values each month and post them here, im very excited to see the future development.