Can analysts predict the future direction of a stock?

After seeing that analyst target prices in Asia are inaccurate, the obvious next question was whether they could at least predict the direction of the stocks they cover so intensely. I was an analyst for most of my career but what I realize now is that I never had time to stop and think about what I was doing. Well, now I have more time…

So the question I asked in this recent research was “can analysts predict the future direction of a stock?”

I started the study with 16,500 stocks in Asia ex-Japan from year-end 2003 to 2013, then removed 9,000 stocks that were small, had low trading volume or were inactive during any of the years. I then removed the 2,200 China A-shares stocks, leaving 5,300 available stocks across Asia. The last step was isolate the stocks out of this group had at least three analyst predicting target prices. This left me with a universe of 1,200 stocks over the 10 years. It was this universe that I performed the following test on.

Here is how I constructed the test. At each month’s end I used the analysts’ average 12-month target price to find the upside/downside from its current price of each stock as predicted by the analyst.

If consensus predicted a stock would have an upside in the next 12 months and the stock moved in that same direction then I assigned a 1 for that month, if not a 0.

I then summed the monthly 1’s and divided this by the number of months that had target prices – if the result was above 0.5 it meant analysts’ average target price gave the right direction for that stock in that year. I then calculated the percentage of stocks where consensus gave the right direction for each year, relative to the total number of stocks covered in that year.

The result was that analysts’ estimates of whether a stock would go up or down were about as accurate as a coin flip. Analyst positive bias was also proven as they tended to be more accurate in a rising market. All this reiterates my message, don’t waste time with target prices.