Do annual rankings of star stock analysts predict their stock-picking abilities? Or are they often a popularity contest?  Two business-school professors have addressed this long-standing Wall Street question. Their answer: Top analysts in the annual rankings by Institutional Investor magazine really do offer more-lucrative recommendations than their peers with lower rankings.  The catch: Investors have to act immediately on “buy” recommendations to take full advantage of the difference.  The professors, Ayako Yasuda, an associate professor of management at the University of California, Davis, Graduate School of Management, and Lily Hua Fang, an associate professor of finance at the Insead business school in Singapore, published their findings in the Journal of Financial Services Research last month. Their research was based on data from 1994 to 2009.  “We wanted to know, if you follow these [top-ranked] analysts’ buy and sell recommendations, and bought and sold stocks accordingly in a timely manner, if that portfolio strategy would have a higher risk-adjusted investment return” than a portfolio based on other analysts’ recommendations, Dr. Yasuda says.  The professors constructed a portfolio that mimicked the buy and sell calls of Institutional Investor’s All-America analysts, who are chosen in a poll of money managers, institutional investors and analysts. Then they measured the results against those of a portfolio based on recommendations from analysts who weren’t ranked the highest. The All-Americans’ recommendations, they found, produced returns that were higher by about 0.6 percentage point a month.  That advantage shrank, though, if the top analysts’ buy recommendations weren’t acted on right away. A portfolio that followed the star analysts’ buy calls one day after they were made produced about half the extra returns of the portfolio that traded on the recommendations the day they were made.  That indicates that clients who receive top analysts’ research notes when they are first issued are in a better position than investors who don’t pay for rapid access to the notes and have to wait until the calls become public.  Or as Dr. Yasuda says, “Investors who have access to these AA analysts’ opinions have a leg up over other investors who get the news when it’s yesterday’s news.”  Ms. Schoenberger is a writer in New York. She can be reached at reports@wsj.com.
A study by two professors found that star stock analysts’ recommendations really are worth more than other analysts’ picks, but the advantage fades if investors don’t act right away.