Identifying Lead Analysts for Stock Selection

Abstract

Analyst forecast revisions are the basis for many quantitative investment strategies. The authors' lead analyst model identifies superior analysts on an individual stock basis. It selects analysts who tend to make revisions away from rather than toward the consensus, and measures their skill in terms of attributes such as courage, forecast accuracy, and influence on other analysts, as well as stock price reaction to their forecasts. For the period 1994–2000 stock selection based on all lead analyst revisions is shown to generate average excess monthly returns of 1.51% over the S&P 500, better than results achieved by using all analyst revisions from any brokerage firm. The model is profitable in 74 of 84 months; excess returns increase to 1.8% when acting only on revisions away from the consensus.