The Sure-Fire Way to Judge a Stock Tip


NEW YORK (MainStreet) — Choosing individual stocks to buy can be a risky proposition, so many investors rely on the research and recommendations made by analysts from investment banks.

Determining which recommendations are valuable and trustworthy can be a daunting task for investors who want the entire picture to draw their own conclusions.

TipRanks, a financial technology company headquartered in Tel Aviv Israel, developed a financial accountability engine to help investors find analyst reports quicker and to check their outcome. TipRanks uses advanced text analysis and financial algorithms to determine the analyst's rate of success and the earning or loss generated by their recommendations when benchmarked against the S&P 500.

"We want to determine who is worth listening to," said Gilad Gat, chief technology officer and co-founder of TipRanks. "Our goal is to provide a simple way for investors to avoid costly mistakes that happen when taking advice based on how convincing the person is or how prestigious is the firm that they work for."

The software tracks over 5,000 analysts and contains data of over 100,000 analyst recommendations since January 2009. TipRanks compares these recommendations to check how many outperformed the S&P 500, an index which is based on the market capitalizations of the 500 large companies listed on the NYSE or NASDAQ.

"We discovered that on average, only 48.8% of the analyst recommendations provided better returns than the S&P 500 in the three months following their publication," Gat said.

TipRanks empowers investors by showing them the measured performance of any analyst they come across online. Investors have full access to all of the analysts' past recommendations and current portfolio. They can also compare the analyst's recommendation to recommendations made by analysts with higher measured performance. Investors can use TipRanks to look up analyst ratings on any stock and get an instant notification any time a recommendation by a top performing expert is released.

"TipRanks gives investors the ability to see a full picture of the person behind the investment recommendation, a way to pick the good from the bad," Gat said. "Otherwise, following an analyst recommendation one comes across online is a little like flipping a coin."

Tip Ranks can also show investors which analysts are the most successful in their predictions in comparison to the S&P 500. The top 10 TipRanks analysts have an overall success rate of 78%, which means 78% of their recommendations performed better than the S&P 500. The bottom 10 analysts have an overall success rate of 19.5% which means only 19.5% of their recommendations performed better than the S&P 500.

"The average profit per recommendation is 13.8% above the S&P 500 for the top 10 analysts compared to 27.6% below the S&P500 for the bottom 10 analysts," he said.

Many analyst reports highlight stocks that have already experienced a "good run" and have received a significant price appreciation during the past six to 12 months, said Sanjoy Ghosh, chief investment officer of Covestor, a Boston-based a registered investment advisor.

Investors should be aware of the risk of following advice from Wall Street only, said Elle Kaplan, CEO of Lexion Capital Management, a New York investment firm.

"There is a reason why Wall Street has very few 'sell' ratings," she said. "After all, why are they recommending a particular investment? They look to benefit their own interests, not necessarily investors' returns."

--Written by Ellen Chang for MainStreet

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