S&P 500 

Chicago,

USA

Location

June 2018 -

Current

Date

Data Analysis

Role

Mentor

Trading Algorithms

Data Analysis

Skills

Mr. Baraq Al - Nabulsi

Palestine Capital Market Authority Head

Analyzing 60,000 + buy and sell recommendations 

Financial Analysts such as JP Morgan, Goldman Sachs, and Barclays charge a starting fee of $30,000 to access their equity research package on the stock performances of S&P 500 companies. The aim of this project is to create a tracker on the performance of the analysts’ picks over a 10-year period and identify if it's profitable to invest in the financial intuitions reports

Data collection

For this analysis, I used data points for S&P 500 companies from 2011. Due to limited access to data, I used Yahoo Finance to access all the analysts’ recommendations and stock performances. There was a total of 66,516 data recommendations that financial analysts made over the past decade. The data recommendations were from 297 financial institutions, but I will focus on the recommendations from the following financial institutions:

Financial Analysts Rating Recommendations

There are over 15 types of rating recommendations that financial analysts can make in a quarter. The recommendations range from negative ratings–Sell, Underperform, or Neutral–to positive ratings–Positive Performer and Buy. 

Overall, the ratings can be divided into four categories (buy, hold, sell and other) and the distribution of the recommendations made by the financial institutions is summarized below. 

Stock Price Change

Once a financial institution makes one of the four rating recommendations, I calculate the stock price change across four periods:

  • One week after rating recommendation

  • One month after rating recommendation

  • One quarter after rating recommendation

To capture the stock price change, I benchmarked it against S&P 500. Following that, I identified what percentage of recommendations increased in value compared to the benchmark. The time horizon, for comparison, was limited to one quarter to avoid any overlap between recommendations.

The average increase in stock price across the time periods for the buy recommendations was better than the SPY benchmark, with one week returns bettering SPY by 40%. On top of that, I benchmarked the stock price increase to the S&P 500 index, where there was an an increase in the stock price. 

Sell recommendations have a short-term impact on the stock price. The one-week performance of stocks that were recommended as a sell was lower than the benchmark. On the other hand, the long-term trend for the stocks with sell recommendation had outperformed over the time period. For the sell recommendations, the stock price did not drop, on average.

Out of the 27K hold recommendations made by the analysts, the average increase in stock price across the time periods were better than the SPY benchmark with one week returns bettering SPY by almost 20%. The hold recommendations had a positive impact on the stock price in the long run with an average of 5% increase. 

Recommendations

Banks' Best Recommendations

I analyzed the returns of the recommendations made by different financial institutions. Barclays recommendations beat the S&P 500 by more than 125% in one-week gains and by more than 30% in quarterly gains. It is important to note that Morgan Stanley had more than 2300 recommendations (the most of any bank) with recommendation's that beat S&P 500 over the long term. 

Money spent on reports to be profitable 

From the analysis reports we can see that the analyst reports beat the market by 23%. On average, full access to analyst reports of a bank will cost $500,000 annually. In order to break even, companies needs to be managing $19million of assets to break even. 

By taking a more conservative side and to ensure that the analyst report fee does not impact portfolio, firms need to make closer to $100 million. 

Limitations of Analysis

  • The data analyzed does not include the full recommendation made by these financial intuitions because the full recommendation list is worth thousands of dollars. 

  •  There are no information on price targets made by the analysts to supplement my analysis.

  • Finally, even though this analysis covers the last 10 years, it had been predominantly a bull run and this can bias the results in favor of the banks. This aspect could explored further by analyzing how poor selling recommendations made by the banks behaved in the long run.

Takeaways

I started the analysis skeptical of the returns generated by the analysts’ recommendations. There has been much speculation about whether analysts have access to information the public does not. Whatever the case may be, the above analysis shows that if those who have access to the analysts’ reports certainly can beat the market over the long run. Whether it is financially viable to access the reports depends on the amount of assets a firm manages, which in this case is at least $100 million.

My Ventures

Stocks

Analyzing banks S&P 500 companies recommendations.  Surprisingly, there were no trackers following the performance of analyst picks over the long term and I decided to build one.

Logistics

Stroke Code

Redesigning the CODE stroke activation process to reduce the Door-in-door out time for stroke patients

PROJECT WILL BE AVAILABLE AUGUST 2021