Zacks Investment Research: Equity Market Anomalies for September 16, 2011

Sep 16, 2011, 13:50 ET from Zacks Investment Research, Inc.

CHICAGO, Sept. 16, 2011 /PRNewswire/ -- Zacks Investment Research presents their newest list of stocks featured in their weekly Equity Market Anomalies article, which describes how to profit from stock market opportunities.  The stocks in this article focus on the profitable Analyst Anomaly. Stocks include: Capital One Financial Corp. (COF), International Paper Co. (IP), The NASDAQ OMX Group, Inc. (NDAQ), Primoris Services Corporation (PRIM) and Huron Consulting Group Inc. (HURN).

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Learn more about equity anomalies at this site: http://hema.zacks.com/

Here are highlights from our most recent Equity Market Anomalies feature:

5 Stocks Experts Like

Last night I read an article that polled the most renowned music experts on the greatest music albums of all time.  The list of the top 5 includes Rubber Soul, Sgt. Pepper's Lonely Hearts Club Band and Revolver by the Beatles, Highway 61 Revisited by Bob Dylan, and Marvin Gaye's What's Going On.  (I have to admit, the Beach Boys actually made the experts' top 5, but this is my article and I'm vetoing them.  They're OK, but a top 5 album?)  Looking at the list, I would have to say that although they aren't my personal top 5, these are some pretty damn good albums.

So on my train ride in to work this morning, I thought about those music experts and their strong consensus picks and wondered if expert stock analysts could provide insights or other information that would lead to strong, profitable stock picks.  On first thought, you'd think since all this analyst information is highly public, that it's already priced into the stocks and you can't profit from it.  But, herein lies a market anomaly.  Let's take a closer look.

Stock analysts provide many different types of data on companies from buy/hold/sell recommendations to earnings estimates to projected growth rates.  I tested all this information to see if you can beat the market with it.

Beginning with a universe of the largest 3000 stocks, I ran tests from January 2000 until June 2011 by building portfolios based on each of these analyst metrics.  The average annualized return and standard deviation are below:


Return %

Std Dev

4W % Change in Analyst Rating

14.0

24.4

(Up Revisions – Down Revisions)/Total

12.7

24.7

4W % Chg Quarterly EPS Estimate

12.7

27.3

4W % Chg Annual EPS Estimate

11.4

27.7

3000 Stock Universe  

10.0

24.1

Analyst Rating (Strong Buy)  

8.7

28.6

4W % Chg Annual Sales Estimate

4.9

22.6

3-5 yr projected growth rate  

-3.5

38.1



The above results show that four of these measures outperformed the selection universe and three underperformed.  It's interesting to note that the analyst ratings in and of themselves didn't perform better than the selection universe, but the change in analyst ratings did extremely well.  So don't just buy a "Strong Buy" because it's a "Strong Buy."  It's better to buy a "Strong Buy" that moved from something else (like a "Sell" or "Hold") to a "Strong Buy."  

These results also indicate that a company with a high 3-5 year projected growth rate is something that should be shunned like the plague.  As you can see, high expected growth usually ends badly.  However, I did look at excluding those companies with expected growth rates above 20% and the returns improve dramatically (10.8% versus -3.5%).  Remember that the next time you hear someone hawking a stock with projected growth rates above 20%!

Based on the performance figures above, here's a method for finding stocks to take advantage of the Analyst Anomaly:

  • First, create a liquid, investible set of the stocks with the largest 3000 market values and average daily trading volume greater than or equal to 100,000 shares (if there's not enough liquidity, it'll be hard for you to trade).
  • Next, due to the uncertainty regarding some foreign issues, keep only U.S. common stocks.
  • Add another filter by selecting the top 100 stocks with the highest percentage change in the average rating over the last four weeks.  (You want improved consensus ratings.)
  • Then select only those top 50 stocks with the highest net revision (up minus down) over the last four weeks.  (You want to maximize the number of upgrades and minimize the number of downgrades.)
  • Of these 50, pick 25 with the largest percentage increase in the last four weeks of the current quarter's earnings estimate.  (Improving quarterly earnings estimates is good.)
  • Finally, select the top 10 stocks with the highest percentage increase of the last four weeks in the current quarter's earnings estimate.  (Improving annual earnings estimates is good too.)

Here are 5 great stocks based on analyst data (09/15/11):

COF – Capital One Financial Corp.

Capital One is a bank holding company which gathers deposits and makes loans.  Over the last month, analysts have upgraded this stock to Outperform and increased both their quarterly and annual earnings estimates.

IP – International Paper Co.

International Paper operates as a paper and packaging company with worldwide operations.    Analysts we surveyed have been upgrading ratings and earnings estimates for this company, which pays a nice dividend too.

NDAQ– The NASDAQ OMX Group, Inc.

Another company with worldwide operations, NASDAQ provides trading, clearing, exchange technology, and securities listing services.  A few analysts have upgraded their opinion for this company, but of particular interest is the number increasing their earnings estimates.    

PRIM – Primoris Services Corporation

Primoris, a specialty contractor and infrastructure company, provides a range of construction, fabrication, maintenance, replacement, water and wastewater, and product engineering services.  Analyst like this company and have been increasing their earnings estimates due to Primoris receiving many new contracts.  Last month, the company also increased its dividend.

HURN – Huron Consulting Group Inc.

Huron provides operational and financial consulting services in the US.  Last month, analysts upgraded this firm to "Buy" from "Neutral."  Earnings estimates have also been increased due to strong demand for the services this company provides.

To conclude, this article presents examples of how you can use pieces of information provided by analysts and beat the market.  But just remember, don't believe everything analysts say.  Use your own discretion to evaluate what's meaningful and what's not.  Everyone has different tastes, so be aware of that.  In case you were wondering, my personal list of top 5 albums ever produced includes: the Beatles' Sgt. Pepper, Dylan's Highway 61, Gaye's What's Going On, The Clash's London Calling and The Sun Sessions by Elvis.  Although it doesn't discuss music, there is a website that discusses various types of stock market anomalies and how you can profit by them.  Please visit hema.zacks.com and "profit on!"

Click here to learn more about this market beating anomaly and others.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks' portfolios and strategies are available at: http://www.zacks.com/performance.

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