If you have ever wished you hadn't taken the advice of a film critic, or cringed after purchasing a well-reviewed product that turned out to be junk, chances are you have since become a smarter shopper. Bad experiences teach us to be wary of the advice of others, especially those who are being paid to give us advice.
It seems that investors have begun to learn those same lessons. Bloomberg reports that, among companies within the S&P 500, those that were recommended increased 73% (on average) since March 2009. Meanwhile, the companies with the fewest “buy” recommendations were more than twice as successful, gaining 165%.
According to Bloomberg, retailers and restaurant chains are among the banks' favorite investments. But investors who view the recommendations as a contrary indicator are buying into utilities, which disburse the highest dividends after telephone stocks. Wary investors are also turning to banks, which Bloomberg believes are likely to grow three times as fast as the S&P 500 this year.
“When you have a stock that has 15 analysts covering it and it has 15 buys, I can't imagine it has much outperformance left,” said Don Wordell, a fund manager at Atlanta-based RidgeWorth Capital Management Inc. His $1.64 billion RidgeWorth Mid-Cap Value Equity Fund topped 98% of its peers in the past five years. “You've got a stock that has 15 sells on it, you're set up there to have some strong outperformance.”
For the last six weeks, the S&P 500 has been moving upward. Bloomberg data show that the index has gained 88% (up to 1,271.50) since March 9, 2009.
In 2010, the index rallied 13%. Netflix, Inc. (NASDAQ: NFLX) earned the top spot for highest gains, rising 219% last year. Cummins Inc. (NYSE: CMI) scored an impressive 140%.
Previously, analysts predicted that health-care and technology companies would win the year, but they ended up having two of the three smallest rallies among 10 industries in the S&P 500, gaining less than 10%. At the same time, banks and real estate firms – which analysts did not rate very highly – performed the best, rising 19% and 28%, respectively.
Further gains were brought on by the Federal Reserve's stimulus spending, which has poured a reported $600 billion into bonds. Bloomberg says that the companies that earned the most are the ones that are most closely tied to the economy. Cliffs Natural Resources Inc. (NYSE: CLF) is one such beneficiary, gaining 69%.
Still, David A. George, a bank analyst at Robert W. Baird & Co., does not believe that analysts could have foreseen the impending changes to financial regulations.
“A year ago today, financial regulatory reform was not even on people's radar,” he said. “Going into 2010, a lot of investors were positioned in big banks. With the increased political and regulatory scrutiny, you saw money come out of those names and into the regionals.”
Investors: 1, Analysts: 0 [Benzinga]