A supposed advantage that mega cap stocks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) have over others is extensive analyst coverage. This is supposed to provide additional information, access to C-level executive interviews and demonstrate that the stock is worthy of major institutional investing and coverage. But as the examples of Bank of America and Citigroup clearly demonstrate, no analyst coverage is better than too much analyst coverage that is universally wrong.
Bank of America is the worst performing stock in the Dow Jones Industrial Average this year. It is down more than 46% for the year to date, almost 40% for the quarter, almost 30% for the month, and 12% for the last week. Over the last year, when Bank of America has fallen from $15.29 to a closing price of $6.97, there have been eleven analyst recommendations and not a single "sell" recommendation (utilizing data from www.smallcapnetwork.com and www.finviz.com).
Over the past year, Citigroup, after a 10-1 reverse split, has fallen from a high of $51.47 to Friday's close of $26.77. Since May 2010, there have been six analyst recommendations of Citigroup: all positive (again, utilizing data from www.smallcapnetwork.com and www.finviz.com). Citigroup is down 10% for the week, almost 25% for the month, about 30% for the quarter, and more than 36% year to date.
As clearly demonstrated, there is no magic formula, chart, algorithm or graph for a major institutional investor or research analyst that is foolproof (or even works for Bank of America and Citigroup). According to the book, "Hedge Hunters," the best hedge fund managers are right about 60% of the time in stock picking. James Brumley, Chief Analyst of The Rhino Report, has been right about 70% of the time. The key to their success: cutting losses quickly and letting the winners ride.
It is difficult to determine the worth of analyst coverage anymore, other than to day trade on price spikes from upgrades or downgrades. Bank of America and Citigroup are hardly anomalies. The entire market has been flat for the past decade. Few, if any, analysts predicted that.
In addition, 100% of the gains in the overall market for the past decade has come from dividend income, according to James Bogel in his book, "Enough." If analysts were on to that trend, all recommendations would be for capture-the-dividend plays utilizing tax free bond exchange traded funds, as pointed out in the article, "Tax-Free Bond Exchange Traded Funds: the Ultimate Capture the Dividend Play". How many analysts have recommended that?
With the access to information today, small cap stocks offer a number of advantages to the individual investor. As many do not have analyst coverage, there is nothing out there to lead an investor awry. There is plenty of data on websites such as Seeking Alpha and speciality ones such as Smallcap Network. Moreover, favorite analysts can be "Googled" to follow their picks. Brumley and many other successful analysts all post on Seeking Alpha, Smallcap Network, and other sites.
Bank of America is the worst performing stock in the Dow Jones Industrial Average this year. It is down more than 46% for the year to date, almost 40% for the quarter, almost 30% for the month, and 12% for the last week. Over the last year, when Bank of America has fallen from $15.29 to a closing price of $6.97, there have been eleven analyst recommendations and not a single "sell" recommendation (utilizing data from www.smallcapnetwork.com and www.finviz.com).
Over the past year, Citigroup, after a 10-1 reverse split, has fallen from a high of $51.47 to Friday's close of $26.77. Since May 2010, there have been six analyst recommendations of Citigroup: all positive (again, utilizing data from www.smallcapnetwork.com and www.finviz.com). Citigroup is down 10% for the week, almost 25% for the month, about 30% for the quarter, and more than 36% year to date.
As clearly demonstrated, there is no magic formula, chart, algorithm or graph for a major institutional investor or research analyst that is foolproof (or even works for Bank of America and Citigroup). According to the book, "Hedge Hunters," the best hedge fund managers are right about 60% of the time in stock picking. James Brumley, Chief Analyst of The Rhino Report, has been right about 70% of the time. The key to their success: cutting losses quickly and letting the winners ride.
It is difficult to determine the worth of analyst coverage anymore, other than to day trade on price spikes from upgrades or downgrades. Bank of America and Citigroup are hardly anomalies. The entire market has been flat for the past decade. Few, if any, analysts predicted that.
In addition, 100% of the gains in the overall market for the past decade has come from dividend income, according to James Bogel in his book, "Enough." If analysts were on to that trend, all recommendations would be for capture-the-dividend plays utilizing tax free bond exchange traded funds, as pointed out in the article, "Tax-Free Bond Exchange Traded Funds: the Ultimate Capture the Dividend Play". How many analysts have recommended that?
With the access to information today, small cap stocks offer a number of advantages to the individual investor. As many do not have analyst coverage, there is nothing out there to lead an investor awry. There is plenty of data on websites such as Seeking Alpha and speciality ones such as Smallcap Network. Moreover, favorite analysts can be "Googled" to follow their picks. Brumley and many other successful analysts all post on Seeking Alpha, Smallcap Network, and other sites.
In addition, access to staff at small cap companies is much easier for investors. Needed information can be gleaned from a variety of sources. For those who think that only professional analysts with institutional resouces can obtain the precise numbers critical for a recommendation, the cases of Bank of America and Citigroup clearly put that to rest.
Obviously, there is an art to reading analyst recommendations. A "neutral" is supposed to mean "SELL!!!" But that is not the point: when every analysis is wrong, that tells you all you need to know. In this earnings season, more than 70% of companies from the Standard & Poor's 500 Index have reported better numbers than analyst expectations. Well, if every company or the great majority are beating analyst earning estimates, than none are beating analyst earnings estimates.
Small cap stocks offer the access that an investor needs and is denied at a major company. This allows for a clearer picture into the true state of financial affairs at a publicly traded company. When every analyst estimate is wrong and almost every earnings report beats estimates, then the only value from this information is in profits from speculating (gains from market conditions, not the condition of the company), not investing. As about 95% of day traders lose money, the odds are not on the side of the speculator. For the investor, small caps offer a more accurate look at the direction of the price of the stock, which leads to profits over the long term. As Peter Lynch, the legendary investor who guided the Magellan Fund to annual returns of 29.2% from 1977 to 1990 remarked, "Invest in what you know."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
