Can Analysts Pick Stocks for the Long Run?

Welcome to MutualFunds.com

Please help us personalize your experience and select the one that best describes you.

Your personalized experience is almost ready.

Join other Individual Investors receiving FREE personalized market updates and research. Join other Institutional Investors receiving FREE personalized market updates and research. Join other Financial Advisors receiving FREE personalized market updates and research.
Not interested

Thank you!

Check your email and confirm your subscription to complete your personalized experience.

Thank you for your submission

We hope you enjoy your experience

Channels

Fixed Income Channel

Fixed income news, reports, video and more.

Municipal Bonds Channel

Municipal bonds news, reports, video and more.

Practice Management Channel

Practice management news, reports, video and more.

Portfolio Management Channel

Portfolio management news, reports, video and more.

Retirement Channel

Retirement news, reports, video and more.

Strategists Channel

Learn from industry thought leaders and expert market participants.

Calvert’s Advisor Resource Center

Deepen your understanding of Responsible Investing and learn how it can potentially help you build a more successful practice.

Screener
Funds
Categories

18 Most Popular Mutual Fund Categories

Canada Equity Funds Global Equity Funds Micro-Cap Equity Funds Precious Metals Equity Funds Water Equity Funds
Consumer Staples Funds US Funds China Funds Israel Funds Retirement Income Funds
Bear Market Strategy Funds Market Neutral Funds Alternative Funds Commodity Funds
Currency Funds Mortgage-Backed Securities Funds High Yield Municipal Bond Funds Money Market Funds

View All Categories

Fund Companies

15 Most Popular Fund Companies

Vanguard Fidelity Investments American Funds T. Rowe Price
JPMorgan BlackRock Dimensional Fund Advisors Franklin Templeton
PIMCO Goldman Sachs Federated MFS
Charles Schwab John Hancock Invesco

View All Fund Companies

15 Most Popular Fund Company Quick Screens

Vanguard Index Funds Vanguard Retirement Funds Vanguard Money Market Funds Fidelity Index Funds
Fidelity Money Market Funds Fidelity Blue Chip Growth Equity Funds American Balanced Funds T. Rowe Price Blue Chip Growth Equity Funds
Blackrock Global Allocation Funds Franklin Income Funds PIMCO Income Funds Charles Schwab Index Funds
Charles Schwab Money Market Funds Invesco Real Estate Funds Matthews Asia International Funds

View All Fund Company Quick Screens

Articles

Articles

Mutual Fund Education Index Fund Center Domestic Stock Funds International and Global Stock Funds Target-Date Funds
Fixed-Income Funds Asset Allocation Specialized Funds Enhanced Index Funds Actively Managed Funds
No-Load Funds Bond Funds Equity Funds Hybrid Funds Resources For Mutual Fund Investors
Q&As and Interviews Lighter Side: Quizzes and More Taxation Expert Analysis and Commentary News
Advisors

Advisor Access

Receive email updates about fund flows, news, upcoming CE accredited webcasts from industry thought leaders and more.

Practice Management

Content focused on helping financial advisors build successful client relationships and grow their business.

Portfolio Management

Content geared towards helping financial advisors build better client portfolios.

Expert Opinion

Get insights on the industry trends and investment news from leading fund managers and experts.

You have successfully subscribed to Advisor Access. Thank you!
Help us personalize your experience.
Which type of investor describes you best?
Help us personalize your experience.
What is your AUM?
Knowing your investable assets will help us build and prioritize features that will suit your investment needs.

Congratulations on personalizing your experience.

Email is verified. Thank you!

Can Analysts Pick Stocks for the Long Run?

Larry Swedroe

|

Picking Stocks Image
Academic research has uncovered a persistent drift in stock prices following (and in the same direction as) forecasted earnings revisions from financial analysts. The post-revision drift (PRD) anomaly implies that investors are slow to process earnings news in analysts’ forecasts. It is also one of the more puzzling anomalies in finance. One hypothesis for the PRD anomaly’s existence is that transaction costs can be high enough to prevent arbitrageurs from correcting mispricings, allowing it to persist.

PRD

Oya Altinkilic, Robert Hansen and Liyu Ye contribute to the literature on the PRD anomaly with their study, Can Analysts Pick Stocks for the Long-Run?, which was published in the February 2016 issue of the Journal of Financial Economics. Their study covered the period from 1993 through 2010. Controlling for the well-documented post-earnings announcement drift (PEAD), which could enlarge measurements of average PRD, and splitting the full period into a pre-period (1993 through April 2003) and post-period (May 2003 through 2010), the authors found:
  • On average, PRD is no longer persistently different from zero.
  • Investors are no longer underreacting to revisions of earnings forecasts.
  • There’s no longer support for the hypothesis that analysts typically supply new information that correctly picks stocks for the long run.
  • There also was no significant association with extreme revisions, a commonly used proxy for better-informed analysts.
  • PRD has broadly vanished because of a general decline in transaction costs, pushed down to historic lows by decimalization, the expanded use of supercomputers and algorithmic trading. The disappearance of PRD coincides with notable reductions in transaction costs that have attracted profit-taking arbitrageurs to PRD.
  • Consistent with the hypothesis that high transaction costs allow anomalies to persist, there is evidence of statistically significant average PRD in the lowest decile (the bottom 10% of the revisions) when ranking by trading volume. Stocks exhibiting PRD tended to be very low priced, have limited trading volume and are more likely to be listed on the Nasdaq, thus having higher trading costs (median quoted bid-ask spreads are larger in the supercomputer era for Nasdaq-listed firms than for NYSE-listed firms).
  • Out-of-sample tests covering the period from 1996 through 2010 confirm a general absence of PRD during the post-period in the other six countries studied: Canada, France, Germany, Italy, Japan and the U.K., countries which have also had declining trading costs.
The authors’ findings are consistent with the themes Andrew Berkin and I discussed in our book, “The Incredible Shrinking Alpha.” In it, we presented evidence of a persistent trend that has resulted in an ever-declining percentage of active managers able to generate statistically significant alpha. In 1998, when Charles Ellis published his book, “Winning the Loser’s Game,” about 20% of actively managed mutual funds were generating statistically significant alpha. Today, that figure is about 2%, even before considering taxes.

The Bottom Line

As the authors noted, the implication for investors is that “the general decline in transaction costs has allowed information to be incorporated more quickly and completely into security prices, eliminating both profit opportunities from strategies that use analysts’ revisions, as well as the predictability of long-run returns based on the revisions. The disappearance of PRD therefore exemplifies how rational pricing of securities interacts with changes in real inefficiencies to extend market efficiency.”

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Read Next

Picking Stocks Image

Can Analysts Pick Stocks for the Long Run?

Larry Swedroe

|

Academic research has uncovered a persistent drift in stock prices following (and in the same direction as) forecasted earnings revisions from financial analysts. The post-revision drift (PRD) anomaly implies that investors are slow to process earnings news in analysts’ forecasts. It is also one of the more puzzling anomalies in finance. One hypothesis for the PRD anomaly’s existence is that transaction costs can be high enough to prevent arbitrageurs from correcting mispricings, allowing it to persist.

PRD

Oya Altinkilic, Robert Hansen and Liyu Ye contribute to the literature on the PRD anomaly with their study, Can Analysts Pick Stocks for the Long-Run?, which was published in the February 2016 issue of the Journal of Financial Economics. Their study covered the period from 1993 through 2010. Controlling for the well-documented post-earnings announcement drift (PEAD), which could enlarge measurements of average PRD, and splitting the full period into a pre-period (1993 through April 2003) and post-period (May 2003 through 2010), the authors found:
  • On average, PRD is no longer persistently different from zero.
  • Investors are no longer underreacting to revisions of earnings forecasts.
  • There’s no longer support for the hypothesis that analysts typically supply new information that correctly picks stocks for the long run.
  • There also was no significant association with extreme revisions, a commonly used proxy for better-informed analysts.
  • PRD has broadly vanished because of a general decline in transaction costs, pushed down to historic lows by decimalization, the expanded use of supercomputers and algorithmic trading. The disappearance of PRD coincides with notable reductions in transaction costs that have attracted profit-taking arbitrageurs to PRD.
  • Consistent with the hypothesis that high transaction costs allow anomalies to persist, there is evidence of statistically significant average PRD in the lowest decile (the bottom 10% of the revisions) when ranking by trading volume. Stocks exhibiting PRD tended to be very low priced, have limited trading volume and are more likely to be listed on the Nasdaq, thus having higher trading costs (median quoted bid-ask spreads are larger in the supercomputer era for Nasdaq-listed firms than for NYSE-listed firms).
  • Out-of-sample tests covering the period from 1996 through 2010 confirm a general absence of PRD during the post-period in the other six countries studied: Canada, France, Germany, Italy, Japan and the U.K., countries which have also had declining trading costs.
The authors’ findings are consistent with the themes Andrew Berkin and I discussed in our book, “The Incredible Shrinking Alpha.” In it, we presented evidence of a persistent trend that has resulted in an ever-declining percentage of active managers able to generate statistically significant alpha. In 1998, when Charles Ellis published his book, “Winning the Loser’s Game,” about 20% of actively managed mutual funds were generating statistically significant alpha. Today, that figure is about 2%, even before considering taxes.

The Bottom Line

As the authors noted, the implication for investors is that “the general decline in transaction costs has allowed information to be incorporated more quickly and completely into security prices, eliminating both profit opportunities from strategies that use analysts’ revisions, as well as the predictability of long-run returns based on the revisions. The disappearance of PRD therefore exemplifies how rational pricing of securities interacts with changes in real inefficiencies to extend market efficiency.”

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Read Next

Advertisement

×

Wait! Do you know all the important aspects of mutual funds?

×

Free Advisor Access newsletter emailed to you.

Receive free and exclusive email updates for financial advisors about best performers, news, CE accredited webcasts and more.

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Disclaimer: By registering, you agree to share your data with MutualFunds.com and opt-in to receiving occasional communications about projects and events. The contents of this form are subject to the MutualFunds.com Privacy Policy. You can unsubscribe at any time.

X