It does not take a financial guru to know that there are stocks not worth buying. After all, if every equity was a guaranteed moneymaker everyone would play the stock market. But of course that’s pretty far afield from the truth. Even most hedge funds, managed by ostensible experts, still underperform the S&P 500. Picking stocks is hard, guys.
But still the experts try, assembling portfolios of a select few stocks while shunning the vast majority of plays. It would reason that analysts, when assessing stocks, would only recommend the stocks they truly thought can beat the average at a "buy," while divvying out a larger amount of "sells." When it comes to analyst ratings though, that’s not the case. Very, very far from it, in fact.
Buy! Buy! Buy!
Something curious happens when you look to see what the analysts, the ones who supposedly know more about securities than anyone else, say about stocks in general. In short, they almost never give stocks bad ratings. Of 6,375 stocks available for public investment on finviz.com, currently only 74 have a consensus of “sell” or worse. That means almost 99 percent of major, non-OTC stocks have at least a “hold.” To be precise, 1,310 stocks have that neutral consensus rating, meaning they're at least worth a "wait and see."
That means over 75 percent of stocks on the market have a buy rating or better. We are currently in a bullish market, but this seems a little high. By this rationale, if a neophyte investor just picked a stock at random, they’d have a 75 percent chance of picking a winner, or at least one that was expected to gain some value.
Seeking a (2013 Return Greater than 20.33 Percent)
If that was true, that 75 percent of stocks were a buy, then more hedge fund managers with all their expertise would beat the S&P. For self-directed investors, there’s 475 stocks on the market currently have a consensus of “strong buy,” only two of which – H&R Block, Inc. ($HRB) and Quanta Services, Inc. (PWR) – are also on the S&P 500, implying there’s tons of hidden gems out there for the independent buyer to find.
But with all these strong buys, and all this expertise, the majority of investors don’t beat the old, slow n’ steady S&P. So what gives?
You Don’t Make Money Telling People to Sell
Analysts who assign rating usually work for investment banks. Investment banks, by the very name, make money off of investments. Specifically, they encourage outside investors to invest. The cynical answer to the question “Why do only 1 percent of stocks get a sell or strong sell rating?” is “Investment banks aren’t in the business of driving business away.”
A more optimistic answer however, isn’t that analysts are trying to pull the wool over investor’s eyes, and pumping stocks they don’t truly believe in. It’s that the market, right now, is very good.
This has been an amazing year for the market, with the S&P 500 hitting its all-time high, as the losses from the financial crisis have been largely erased. Analysts have every right to be giddy. But it does certainly mean that when touting a stock's "buy" consensus, it doesn't mean it's special.