In Brief
A recommendation level screen would focus on buying the most recommended stocks in the market based on the broker consensus. This is to be contrasted with a screen that focuses on those stocks most recently upgraded – a ‘recommendation revision’ screen. Overall, it appears that the absolute level of published stock recommendations has little (or even detrimental) value to investors, but monitoring the changes in investment recommendations can prove more productive.
Background
Broker recommendations as to whether clients should buy, sell or hold stocks are widely reported in the media. Despite this, the value of these recommendations is hotly debated. The issue is that broker recommendations have historically exhibited a strong upward bias. Researchers Jegadeesh, Kim, Krische and Lee found that the average analyst rating over the 1985 to 1999 period was close to a buy recommendation and sell or strong sell recommendation made up less than 5% of all recommendations. This is because most sell-side analysts work for brokerage houses which often have strong investment banking franchises, creating a potential conflict of interest when firms act as investment bankers to the companies their analysts cover. Following the debacle of the late 1990s, legislators have taken action to address this…
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