KEY POINTS:
The four stocks that Wall Street analysts most despised at the start of 2006 posted an average 21 per cent return for the year.
The four stocks they most loved returned 2.4 per cent, far worse than the return of almost 16 per cent on the Standard & Poor's 500 index.
In short, the despised walloped the favoured. Is that a freak result? No.
For nine years, I have been studying the annual performance of the four stocks analysts most unanimously recommend as well as the four for which they issue unusually large numbers of "sell" recommendations.
The analysts' darlings lost 3.7 per cent a year, on average. The stocks they hated declined 0.2 per cent.
Both groups of stocks did worse than the S&P 500, which returned 7.4 per cent a year, on average, during the period of the study: 1998 through 2006.
Analysts are tastemakers in the investment world. They set the frame of investors' expectations, provide much of the information and move stocks with their "buy" and "sell" recommendations.
Yet as my study shows, they are far from infallible. I don't begrudge Wall Street analysts their successes, I simply say you should make an independent decision when you invest. Analysts generally can't foretell the future any more than you can.
When 2006 began, five analysts had published opinions on the stock of Martha Stewart Living Omnimedia, four were "sell" recommendations.
Based in New York, the company publishes magazines, produces merchandise and TV shows; all promoting a stylish lifestyle.
It was easy to see why the analysts were negative. Founder Martha Stewart had just served five months in prison for obstruction of justice and was barred from running the company in the future. It had posted losses in eight of the past 10 quarters.
So what did Martha Stewart stock do? It rose 29 per cent in 2006, even though red ink continued to flow. Investors liked the rising revenue of the company, which they expect will turn profitable this year.
An even bigger gain analysts didn't foresee was that of CBOT Holdings, parent company to the Chicago Board of Trade. It was up 62 per cent last year, even though five analysts out of seven slapped a "sell" rating on it.
Truth to tell, I would have agreed with them. I think CBOT stock was overvalued then and is even more so now at 56 times earnings, 12 times book value and 14 times revenue.
The analysts were right about Sycamore Networks, which fell 13 per cent. The other stock they hated a year ago was Washington Federal, which turned out to be a modest gainer in 2006, up 6 per cent.
And what about the stocks they loved?
SI International, unanimously recommended by 11 analysts, rose 6.1 per cent. The Virginia-based company provides information technology to the federal Government.
Petrohawk Energy, beloved by all eight analysts, dropped 13 per cent. The Houston-based company explores for and produces oil and gas.
Another loser was Sunterra, a timeshare-vacation company with headquarters in Las Vegas. It declined 15 per cent even though all seven analysts who followed it recommended it.
TAL International was the best performer among those stocks. The New York-based company leases large freight containers that can be moved by ship, rail or truck. Last year, it jumped 29 per cent in price and returned 32 per cent including dividends.
For the past nine years, I have acquired key data for this study from Zacks Investment Research in Chicago. This year, I was unable to find the information so am taking a new tack.
Using Bloomberg data, I looked at analysts' recommendations on the 30 stocks that make up the Dow Jones industrial average.
Bloomberg publishes average ratings for each stock, on a scale where five equals a "strong buy," three is a "hold," and one is a "sell".
Altria, a New York-based company that owns Kraft Foods and is the largest United States cigarette producer, is analysts' favourite stock among the 30. Its average rating is 4.64.
There are many things to like about Altria, among them a dividend yield of almost 4 per cent, and a return on equity last year of more than 31 per cent. However, the stock has quadrupled since the end of 1999 and I think it is now fairly valued.
American International, United Technologies, General Electric and Honeywell International also get high analyst ratings, ranging from 4.30 to 4.62. Of these, I prefer AIG, which sells for only 15 times earnings.
Analysts don't like General Motors (2.22), yet I wouldn't be surprised to see it do well in the year ahead. Merck and Intel get lukewarm grades (3.57 and 3.58). I like them but don't love them after recent run-ups.
* Disclosure: I own shares of Merck personally and Intel for clients.
* John Dorfman, president of Thunderstorm Capital in Boston, is a Bloomberg News columnist. The opinions expressed are his own.
