At our recent webinar with CEO Uri Gruenbaum, we were inundated with questions. Uri answered many of them at the webinar (scroll down to see the video). We are answering the remainder in this series of blogs.
This first article mainly answers questions related to how we measure and rank Wall Street analysts.
Questions About Wall Street Analysts
Q: Analysts in “hot” sectors are by default ranked higher. How well do you separate the better analysts?
A: That’s a great question! If you look at the top 25 analysts on TipRanks, analysts that cover Technology usually dominate the list, given the success of this sector over the past decade.
We make it possible to search for the top 25 analysts according to eight different sectors, so you can easily find and follow these experts.
Q: Apart from sector, are there other ways to see an analyst’s performance?
A: Yes. When looking for the top 25 analysts, you can adjust the timeframe to see which analysts perform best over long- and short-term periods. Additionally, you can search for the top 25 analysts when compared to the S&P 500 and sector.
With regards to individual analysts, you can adjust their performance according to the different categories and benchmarks. There are 4 different timeframes that you can see analyst performance for. These include 1 month, 3 months, 1 year, and two years.
Let’s take the example of current no. 1 analyst Brian Schwartz from Oppenheimer. You can see how his overall ranking, success rates, and average returns adjust when looking at different criteria. For example, measured over a 1-month timeframe he ranks number 27 and has a success rate of 60%, compared to 82% over a 1-year period. When compared to the S&P 500, he has a 63% success rate over one year, beats the S&P by 19.1%, and ranks in 16th place.
Q: Why are analysts with negative returns sometimes “Top Analysts”?
A: It may be that you are seeing analysts with a less than 50% success rate that deliver positive returns.
Let’s look at Ming-Hsun Lee, from Bank of America Securities. He is a 5-star analyst, with a 45% success rate, and an average return of 90.9% on 22 stock ratings.
We consider three factors when measuring and ranking analysts.
1 Success rate – how often the analyst is right or wrong with their recommendations.
2 Average return – the analyst’s average return per stock rating.
3 No. of ratings (statistical significance) – the more we know about an analyst the more accurately we can rate them. Statistically, the more ratings an analyst has made, the higher their chances of being ranked better. It is far more difficult to get it right 200 times than it is 10 times.
Q: How long have you been tracking and measuring Wall Street analysts?
A: We started the company in 2012. With so much data available online we were able to backtrack analyst ratings to 2009. Saying that ratings made from 2013 onwards are the most reliable.
Q: I get lots of alerts for analysts’ Buy ratings but rarely get alerts for Sell ratings, why?
A: For the simple reason that analysts seldom make Sell ratings. This may be partly to do with conflicts of interest that analysts can face. This is one of the issues we’re trying to resolve by tracking and measuring analyst performance. We found that the big banks are more likely to give Sell ratings, compared to smaller tier-two and tier-three firms. This is possibly because they are more heavily regulated.
Usually, 60% – 70% of analyst ratings are Buy, around 25% are Hold, which explains why you don’t see many Sell ratings.
You can use TipRanks to see the distribution of ratings by each analyst. Below, you can see the rating distribution of the top 3 analysts.
Q: Is it possible to rank analysts that say Hold and see how many times they are right as a short sell?
A: It’s a great question and it’s something we will look into.
Watch the Q&A Session
Here’s the recording of the part of the webinar where Uri answered questions.
Watch out for the next in our series of articles where we answer your questions about the Smart Score among others.