Analysts Are Good at Ranking Stocks

Abstract

Sell-side analysts' forecasts of stock returns are biased and the consensus forecast is a poor cross-sectional predictor. In sharp contrast, the implicit ranking of stocks by each analyst is highly informative of subsequent returns. Long-short portfolios sorted on these rankings result in large and highly significant excess returns that cannot be explained by previous anomaly characteristics. The strong performance is most easily understood by noting the similarity between rankings and within-analyst demeaned forecasts. The latter are equivalent to removing each analyst's fixed effect and thus controlling for unobservable analyst-specific biases. We document analogous results using analysts' recommendations and earnings forecasts.

Keywords: Sell-side analysts, Cross-section of stock returns, Relative valuation, Target price, Earnings forecasts, Recommendations

JEL Classification: G12, G14, G24