Some interesting quant action from Deutsche today. Buy mediocre stocks!
The most and least popular stocks tend to perform the worst
This report examines what the consensus of analyst recommendations can tell us about relative stock performance. To assess this, we calculate the relative return over time of owning each quintile of stocks by popularity, with a quarterly re-balance. Our findings indicate that the most and least popular 20% of stocks have performed the worst, with middle quintiles performing best. What could explain this?
The market is likely to discuss popular stocks more, making investors familiar with the investment thesis. As a result, interested investors may have already bought the stock, leaving few marginal buyers. The least popular stocks tend to have the most ‘sell’ recommendations. Such recommendations aren’t very common (~15% of ratings, vs 40-45% for ‘buys’ and ‘holds’), giving them scarcity value which the market may be more likely to act upon.
Banks popular relative to history, resources neutral
At the sector level, banks and defensive industrials are quite popular relative to history, which suggests caution. In contrast, sentiment towards resources is broadly neutral. Amongst cyclical industrials, offshore cyclicals are quite popular and resource-related names are not. The more neutral areas are domestic cyclicals and financial-market exposed stocks.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
