Analysts, Industries, and Price Momentum

50 Pages Posted: 13 Mar 2003

See all articles by Leslie Boni

Leslie Boni

California State University, Monterey Bay

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

Date Written: August 2004

Abstract

The information value of analysts' recommendations is particularly enhanced by taking an industry perspective. Three benefits emerge. First, we show that analyst recommendation changes provide signals that can be used to successfully rank future relative underperforming and outperforming stocks within industries. When this ranking is used to form industry-neutral portfolios, the return-to-risk ratio improves almost 100% relative to portfolios in which industry weighting is ignored. The value of analyst recommendation signals, examined with the industry perspective, is remarkably consistent through time. Industry-neutral portfolio Sharpe ratios are six times larger than those of typical price momentum strategies. Second, examining recommendation information by industry permits the disentanglement of the value added by analysts from the well-documented price momentum anomaly. Equal-industry-weighted recommendation portfolios have greatly reduced loadings on price momentum relative to un-weighted strategies. Third, the industry perspective permits an examination of the link between analyst recommendation information, aggregated at the industry level, and industry returns.

Industry returns precede industry-aggregated analyst information in the next month, suggesting that analysts take strong cues from recent industry returns in revising their opinions on stocks they follow. Perhaps more interestingly, however, we do not find that industry-aggregated analyst recommendation information predicts future relative underperforming and outperforming industries in any meaningful, incremental way.

JEL Classification: G14, G24

Suggested Citation

Boni, Leslie A and Womack, Kent L., Analysts, Industries, and Price Momentum (August 2004). Tuck School of Business Working Paper No. 03-12. Available at SSRN: https://ssrn.com/abstract=387220 or http://dx.doi.org/10.2139/ssrn.387220

Leslie A Boni

California State University, Monterey Bay ( email )

100 Campus Center
Seaside, CA 93955
United States

Kent L. Womack (Contact Author)

University of Toronto - Rotman School of Management (Deceased)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,380
Abstract Views
5,489
rank
14,106
PlumX Metrics