Using Analysts as Contrarian Signals

by: Davy Bui

Investors imbue analysts with high levels of credibility at their own risk. Wall Street analysts communicate in their own cryptic language that may impersonate English but rarely means what it says. When is a buy a buy and a hold a sell? In his book, Full of Bull, former Wall Street analyst, Stephen McClellan, divulges many of the open secrets about analyst-speak that gets retail investors in trouble.

This analyst double-speak is the basis for this week's screen. Analysts are often stuck upgrading or downgrading a stock after the big move in the stock has already happened. Here was the criteria for the screen:

  • Current Avg Broker Recommendation>= 4.0;
  • Number of Brokers in Rating >= 2;
  • Optionable = "YES";
  • Current Dividend Yield >= 3%;
  • Price-to-cash-flow <= 10;

View the full results of the screen in spreadsheet format here.

Analyst ratings of 4.0 or higher indicate a strong sell call. I added in the optionable requirement as well as a yield so that we are paid to wait in case the stock takes a long time to realize its true value.

Interestingly enough, this screen yields nine names, five of which are REITs. The high dividend requirement probably factored in finding so many REITs and it seems analysts are still very skeptical of that sector. The non-REIT names ranged from auto insurer, Mercury General Corporation (NYSE:MCY), to Christopher & Banks Corp (NYSE:CBK), the retailer.

Please note that prices listed are as of 10/10/2009, when I ran the screen.

Disclosure: None