Beware of Professional Buy and Sell Recommendations

Bashing stock analysts' recommendations has become fashionable since the stock market bubble burst in 2000. The following chart shows there is legitimate justification to continue.

Since May 1998 analysts have made 63 upgrade (buy) and downgrade (sell) recommendations for Kulicke & Soffa (KLIC), a semiconductor equipment maker. The chart of recommendations and closing prices (see Yahoo! Finance for the list of upgrades and downgrades) shows a pattern of buy high, sell low recommendations. The cluster of downgrades in the summer and fall of 2000 is especially striking. Rather than tell you to sell at high prices as KLIC peaked in the the mid $40 range, analysts waited until the stock tumbled 40% or more to tell you to sell. The same sell low pattern is evident in the the summer and fall of 2002. For the current cycle analysts are telling us the buy on the downside after the stock peaked in November 2003. So far KLIC isn't low enough for the analysts to tell us to sell.

There were some good buy calls on the upside but most recommendations told us to buy near the top, buy on the downside and sell low.

Detailed Inspection of Recommendations from 2002 to 2004

During the period from April 1, 2002 to April 16, 2004 analysts made 14 upgrade (buy) and downgrade (sell) recommendations of which 11 produced unprofitable trades. If you had followed their recommendations and invested $14,000 ($1,000 per recommendation), you would have ended up with $10,018.06, a loss of 39.75%. Your largest single loss was 74.84% and your best single gain was 25%. Note: Buy recommendations without a corresponding sell recommendation were evaluated using the April 16, 2004 closing price of $10.95.

During this period KLIC fell from $21.15 to $1.95 and then rose a spectacular 767% to $16.9. So even when the stock price rose over eight fold ($1.95 to $16.9) the best analyst pick was a gain of only 25%.

Professional Recommendations for KLIC Can They Get any Worse?
11 of 14	Frequency of unprofitable recommendations.
-39.75%	Total percentage loss for all recommendations.
-74.84%	Percentage loss for the single worst recommendation.
25%	Percentage gain for the single best recommendation.

How did professional analysts from eight well-known brokerage and research firms give such horrific, amateurish advice? Simply put - they violated many sound buy and sell principles. They bought on the downside and they bought on the upside near the top. And they sold near the bottom.

The next time you're tempted to buy or sell based on analysts' recommendations remember this article.