Which is best? Star analyst forecasts, or forward guidance?
BETTER to trust independent analysts or company bosses when it comes to forward guidance? It appears insiders really do know best.
That’s according to a recent study from the University of New South Wales, which suggested so-called ‘star’ analysts – those picked out on the Institutional Investor All-American analyst team or the European Extel survey – regularly ignored company guidance, and were “typically” no better than analysts who stuck with the company’s guidance.
However, even though star analysts’ forecasts were less accurate when they ignored company guidance, their impact on the market was greater.
If a star analyst makes a forecast that differs more from company guidance, the study found that share prices reacted 21 per cent more strongly than if a regular analyst made such predictions.
The researchers suggested this was because star analyst forecasts sacrifice accuracy for bringing out new information not yet incorporated into a company’s guidance.
However, Joachim Klement, an (ahem) analyst at investment bank Liberum, believed this was unlikely to be the case. “It is the fame of these star analysts that makes the market move, not the ‘informativeness’ of their forecasts,” Klement said.
“Star analysts think they know better, and investors are worse off if they believe them.”
There is good news in the study, however. London’s analysts weren’t included in the research.