How good are the forecasts of stockmarket analysts?

[BlackPeter]

We love to be cynical and beat stock market analysts up while secretly still following their analysis, at least if it suits our agenda - don't we?

I thought I try to put a bit of analysis into this area, then at least we will know.

Rules of the game:

I shall take the consensus and the recommendation of NZX listed companies which are regularly analysed by more than one analyst and compare 12 months later what really happened. Companies researched will come off my watch list (in this case I have all the numbers anyway available).

Consensus and recommendation taken from marketscreener.com

If the share price of the stock in forecast month is within consensus +/- 10% then I call that a PASS, otherwise I call that a FAIL. Fair enough?

If recommendation is HOLD, I call it a pass if stock performed similar to NZX50 +/- 10%
If recommendation is OUTPERFORM or BUY I call it a pass if stock outperformed NZX50
If recommendation is UNDERPERFORM or SELL I call it a pass if stock underperformed NZX50.

These are the companies and forecasts I looked at so far ...



Stock
prediction timeframe
analyst hitrate
link to post


ABA
Feb-19 to FEb-20
Shareprice Forecast Fail; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?7598-ABA-Abano-health&p=796127&viewfull=1#post796127




AIA
Feb-19 to Feb-20
Shareprice Forecast Fail; Buy Recommendation: Pass;
https://www.sharetrader.co.nz/showthread.php?5121-Auckland-International-Airport-Limited-(AIA)&p=801656&viewfull=1#post801656




ANZ
Jan-19 to Jan-20
Shareprice Forecast Pass; Buy Recommendation: Fail;
://www.sharetrader.co.nz/showthread.php?9513-ANZ-NZX-Anyone-holding&p=791775&highlight=ANZ#post791775


A2M / ATM
Jan-19 to Jan-20
Shareprice Forecast: Fail; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?2318-ATM-A2-Corporation-Limited&p=792116&viewfull=1#post792116


FBU
Feb-19 to Feb-20
Shareprice Forecast: Pass; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?10702-Fletcher-Building-(FBU)&p=795413&highlight=FBU#post795413




FPH
Jan-19 to Jan-20
Shareprice Forecast: Fail; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?8537-Fph&p=791601&viewfull=1#post791601


HGH
Jan-19 to Jan-20
Shareprice Forecast Fail; Buy Recommendation: Pass;
https://www.sharetrader.co.nz/showthread.php?8425-HGH-Heartland-Group-Holdings&p=791874&viewfull=1#post791874


KMD
Feb-19 to Feb-20
Shareprice Forecast Fail; Buy Recommendation: Pass;
https://www.sharetrader.co.nz/showthread.php?7128-Kathmandu-IPO&p=797912#post797912




MCY
Jan-19 to Jan-20
Shareprice Forecast Fail; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?9340-Meridian-Float&p=791423&viewfull=1#post791423


MFT
Jan-19 to Jan-20
Shareprice Forecast Fail; Buy Recommendation: Pass;
https://www.sharetrader.co.nz/showthread.php?760-MFT&p=791142&viewfull=1#post791142



MPG
Jan-19 to Jan-20
Shareprice Forecast Fail; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?9836-Metro-Glass-IPO&p=792449&viewfull=1#post792449




OCA
Feb-19 to Feb-20
Shareprice Forecast Pass; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?9856-Oceania-Group-retirement-villages&p=799799&highlight=OCA#post799799






SCL
Feb-19 to Feb-20
Shareprice Forecast Pass; Buy Recommendation: Fail;


https://www.sharetrader.co.nz/showthread.php?9995-Scales-SCL&highlight=SCL&p=796135#post796135




SPK
Feb-19 to Feb-20
Shareprice Forecast Fail; Buy Recommendation: Pass;


https://www.sharetrader.co.nz/showthread.php?9630-Spark-(TEL)&p=798675&highlight=SPK#post798675





STU
Jan-19 to Jan-20
Shareprice Forecast Fail; Buy Recommendation: PASS;
https://www.sharetrader.co.nz/showthread.php?1835-STU&p=792867&viewfull=1#post792867




SUM
Jan-19 to Jan-20
Shareprice Forecast Fail; Buy Recommendation: FAIL;
https://www.sharetrader.co.nz/showthread.php?5009-Summerset-Group-IPO&p=792252&viewfull=1#post792252




THL
Jan-19 to Jan-20
Shareprice Forecast: Fail; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?5278-THL-Tourism-Holdings&p=790937&viewfull=1#post790937


TPW
Feb-19 to Feb-20
Shareprice Forecast: Fail; Buy Recommendation: Pass;
https://www.sharetrader.co.nz/showthread.php?1363-TRUST-POWER&p=796435&viewfull=1#post796435


XRO
Feb-19 to Feb-20
Shareprice Forecast: Fail; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?4774-Xro-xero&highlight=XRO&p=794962#post794962


ZEL
Feb-19 to Feb-20
Shareprice Forecast: Fail; Buy Recommendation: Fail;
https://www.sharetrader.co.nz/showthread.php?9253-Z-Energy-IPO&p=800689&highlight=ZEL#post800689




Rating of the analyst consensus forecasts so far:

20 stock forecasts checked so far (checking for each consensus and buy recommendation);
Consensus share price forecasts correct: 4/20; analysts hitrate: 20%
Consensus recommendation vs NZX50 correct: 7/20; analysts hitrate: 35%

Work in progress - bear with me :).

[Snoopy]

Analyst hit rate so far: :).


Hi BP, interesting exercise. I am a little confused by your 'analyst hitrate' ratio though, and I will use ANZ as an example. You say it is 1:1 (?)

You state in the ANZ thread that you are looking at the guesses of 15 analysts. From those you derive a 'consensus forecast' of $28.68. Is that just an average of the 15 analysts guesses?

I will give you my understanding of how your rules work in the case of ANZ

1/ First select a baseline. You start with the 'peak price in the prediction month' of January 2019 of $26.19.
2/ The consensus forecast of $28.68 is 9.5% above that. So you are calling this prediction a 'hold' as the gain predicted is under 10%
3/ In order for your 'analyst consensus' to be correct that means the actual gain must be within 10% of the start price. The peak price in January 2020 was $25.90. $25.90 is a loss of 1% from the base value. This is within the plus or minus 10% target you set for a hold recommendation. So in this case you regard the consensus of analysts views as 'satisfactory'.

Now please tell me how that result (if I have gone through all the steps correctly) translates to that 1:1 ratio figure in your table!

SNOOPY

[BlackPeter]

Hi BP, interesting exercise. I am a little confused by your 'analyst hitrate' ratio though, and I will use ANZ as an example. You say it is 1:1 (?)

You state in the ANZ thread that you are looking at the guesses of 15 analysts. From those you derive a 'consensus forecast' of $28.68. Is that just an average of the 15 analysts guesses?

I will give you my understanding of how your rules work in the case of ANZ

1/ First select a baseline. You start with the 'peak price in the prediction month' of January 2019 of $26.19.
2/ The consensus forecast of $28.68 is 9.5% above that. So you are calling this prediction a 'hold' as the gain predicted is under 10%
3/ In order for your 'analyst consensus' to be correct that means the actual gain must be within 10% of the start price. The peak price in January 2020 was $25.90. $25.90 is a loss of 1% from the base value. This is within the plus or minus 10% target you set for a hold recommendation. So in this case you regard the consensus of analysts views as 'satisfactory'.

Now please tell me how that result (if I have gone through all the steps correctly) translates to that 1:1 ratio figure in your table!

SNOOPY

Not quite, but I agree it is complicated :);

1) Well - yes, the "consensus" is (I think) the median of all known analyst forecasts. Many web pages calculate that for you.

If after 12 months the share price hits this consensus (+/- 10%), then I give the analysts one point, if it further away I don't.

The other point comes from the analyst recommendation (again median) - e.g. "BUY", "HOLD", "SELL" which the analysts produce independently from their consensus.

I check what the share price did over the last 12 months compared to the NZX 50. If it moved in line with the NZX50, than I think a HOLD recommendation was appropriate (i.e. another point for the analysts). Same if it outperformed the NZX50 and the recommendation was Öutperform"or BUY"or it it underperformed the NZX50 and the recommendation ws underperform or sell.

If however the analysts recommend a SELL or Underperform (as with e.g. MFT), but the Share price developed 50% better than the NZX50 (which did amazing as well), than I say the analyst recommendation was not helpful. No point.

In the case of ANZ: Analysts predicted a share price of A$28.68 for January 2020, and it reached A$25.90. Not flash, but less than 10% below the prediction, so I called that "'pass"

However - analysts said as well in January 2019 that ANZ will "outperform" other stocks. NZX went up over the next 12 months by something like 27%, while the ANZ share price was after 12 months the same as before. It did not outperform the stock markets, i.e. I call this a fail. This is the 1:1;

Does this help?

[Snoopy]

Does this help?


Ah so you actually doing two separate tests, which are nevertheless slightly different ways of looking at the same thing (how good brokers are with their picks). Your 'ratio' is actually two columns, the first denoting a satisfactory result and the second being unsatisfactory.

With your result scoring system there are three possible outcomes:

1/ Thus the result you are hoping for is '2:0' , a pass for both tests.
2/ '1:1' indicates one pass and one fail AND
3/ 0:2' indicates a double fail

Got it.

SNOOPY

[winner69]

I wonder how good the analyst earnings forecasts are?

They might be pretty good at doing the financial forecast but useless at assessing the market sentiment.

Like they could be spot on EPS and their target price is based on a sensible logical assessment ....but the market goes gangbusters and share prices go up to ridiculous levels ....and their consensus targets are seen as pretty useless.

Maybe you are just showing how over valued the NZX is at the moment.

[SBQ]

Just buy the index and forget about the advisors. One would do a lot better to know in bad times (and it's only a matter of time when a crash happens), to have cash ready on the side to invest. THIS no financial advisor is going to tell you to do this... but they certainly know how to sell on you!

If any manged fund or advisor produces a return or price that is THE SAME as something like the NZ50 - then they have STILL failed their job because the investor is still billed with their admin / mgt fee.

In other posts i've mentioned the issue with such managed funds and those that give financial advice. Specifically links around Warren Buffet's view and his 10 year bet against managed funds how they would perform worse than the S&P500 index return. I would not think the NZX50 would be any different.

[BlackPeter]

Ah so you actually doing two separate tests, which are nevertheless slightly different ways of looking at the same thing (how good brokers are with their picks). Your 'ratio' is actually two columns, the first denoting a satisfactory result and the second being unsatisfactory.

With your result scoring system there are three possible outcomes:

1/ Thus the result you are hoping for is '2:0' , a pass for both tests.
2/ '1:1' indicates one pass and one fail AND
3/ 0:2' indicates a double fail

Got it.

SNOOPY

Correct. I realize now as well that I could make that a bit more transparent. Will think about separating these two tests better in the results.

[BlackPeter]

I wonder how good the analyst earnings forecasts are?

They might be pretty good at doing the financial forecast but useless at assessing the market sentiment.

Like they could be spot on EPS and their target price is based on a sensible logical assessment ....but the market goes gangbusters and share prices go up to ridiculous levels ....and their consensus targets are seen as pretty useless.

Maybe you are just showing how over valued the NZX is at the moment.

You might be right, though some of the stocks so far did ways outperform analyst forecasts and others did underperform them ...

As well, while you are absolutely correct that share price is value plus hype, am I not sure how to separate these two components. Not sure either whether it would be any helpful if you want to use analyst predictions to make money (I suppose most of us do). Nobody pays you for value without the hype.

Given that "the market is always right" is this as well the only fair method to assess the quality of forecasts.

[winner69]

You might be right, though some of the stocks so far did ways outperform analyst forecasts and others did underperform them ...

As well, while you are absolutely correct that share price is value plus hype, am I not sure how to separate these two components. Not sure either whether it would be any helpful if you want to use analyst predictions to make money (I suppose most of us do). Nobody pays you for value without the hype.

Given that "the market is always right" is this as well the only fair method to assess the quality of forecasts.

Like it ....’the market is always right’ and your work seems to be heading towards ‘analysts are generally wrong’

But as long as punters believe they’re gurus they’ll still OK

[BlackPeter]

Just in case anybody is wondering why I didn't continue with this analysis for March ...

Well, while it looks like so far that the analyst predictions are pretty random anyway ... no analyst I am aware of could predict this virus in March 2019, i.e. it would be pretty meaningless for the current bear / high volatility phase to check their one year old stock price forecasts against what really happened during this "black swan event".

I might continue this analysis starting again in April 2021 (and comparing forecasts against April 2020 numbers).

For what it is worth ... I looked so far into 20 companies (with forecasts made in January and February 2019) vs outcomes in January and February 2020.

Instead of just using my (obviously quite arbitrary) pass / fail criteria as per the top post - here is a scatter graph showing the forecasted SP change vs the observed SP change.

11284

As we can see: 20 consensus predictions, 5 of them too optimistic (forecasted consensus 10% or more above achieved SP), 4 of them "realistic (consensus matched target +/-10%), and 11 too pessimistic (target more than 10% above consensus).

Slightly surprising, since we always seem to think that analysts are too optimistic, but they probably just didn't expect the last bull to run as far as it did.

Whatever it is - based on above analysis it appears that throwing darts while being blindfolded might be an absolutely adequate method compared to using analyst consensus to determine where share prices for individual stocks will go.

[BIRMANBOY]

Yes but did you have fun doing it:D
I believe most of the other previous studies of market analysts were done on major world indices, so its comforting to know that our analysts aren't any worse lol.
Just in case anybody is wondering why I didn't continue with this analysis for March ...

Well, while it looks like so far that the analyst predictions are pretty random anyway ... no analyst I am aware of could predict this virus in March 2019, i.e. it would be pretty meaningless for the current bear / high volatility phase to check their one year old stock price forecasts against what really happened during this "black swan event".

I might continue this analysis starting again in April 2021 (and comparing forecasts against April 2020 numbers).

For what it is worth ... I looked so far into 20 companies (with forecasts made in January and February 2019) vs outcomes in January and February 2020.

Instead of just using my (obviously quite arbitrary) pass / fail criteria as per the top post - here is a scatter graph showing the forecasted SP change vs the observed SP change.

11284

As we can see: 20 consensus predictions, 5 of them too optimistic (forecasted consensus 10% or more above achieved SP), 4 of them "realistic (consensus matched target +/-10%), and 11 too pessimistic (target more than 10% above consensus).

Slightly surprising, since we always seem to think that analysts are too optimistic, but they probably just didn't expect the last bull to run as far as it did.

Whatever it is - based on above analysis it appears that throwing darts while being blindfolded might be an absolutely adequate method compared to using analyst consensus to determine where share prices for individual stocks will go.

[BlackPeter]

Yes but did you have fun doing it:D
I believe most of the other previous studies of market analysts were done on major world indices, so its comforting to know that our analysts aren't any worse lol.

Well yes, I did - but I was as well genuinely interested in the result. And to be honest, while I didn't expected a strong correlation between analyst forecasts and outcomes, I still thought there might be some.

But I guess the old saying (I think from Ben Graham) "nobody can predict stock prices" is clearly the most appropriate guidance to any SP forecast - be it by consensus or not.

[peat]

... based on above analysis it appears that throwing darts while being blindfolded might be an absolutely adequate method compared to using analyst consensus to determine where share prices for individual stocks will go.

it is incredible isn't it
especially when one considers how much beef is created about stock selection
and I thank you for your work though
quite frankly it doesn't surprise me in the slightest.

BUT, does it make you wanna go further with this notion of no one having a clue!? ? ?

[BIRMANBOY]

As long as share and stock analysts and firms stick to the brief of analysing previous results, histories and developing strategies suitable for clients they serve a useful purpose but as soon as they start trying to predict future movements, they should be reminded of the poor record humans have in the prediction dept.
Well yes, I did - but I was as well genuinely interested in the result. And to be honest, while I didn't expected a strong correlation between analyst forecasts and outcomes, I still thought there might be some.

But I guess the old saying (I think from Ben Graham) "nobody can predict stock prices" is clearly the most appropriate guidance to any SP forecast - be it by consensus or not.

[kiora]

"In past bubbles, not only has the growth of the inspirational stock or sector inevitably slowed, but these unique winners have proved to be just that … unique. The frenzied search for the “next …” ended in disappointment and large losses in 1969, 1973, 2000 and 2008. Is it really “different this time”?"
https://www.livewiremarkets.com/wires/misleading-narratives