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A Backtest Approach: Do Wall Street Analysts Add Value?

The stock price guessing game could be another demonstration that 'competition is for losers'

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Steven CHEN
May 09, 2019
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"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."


Warren Buffett (Trades, Portfolio)


Warren Buffett (Trades, Portfolio) has been long famous for his criticisms of so-called "helpers," which are mainly buy-side fund managers, due to their no-value-added services and fees. But what about those sell-side Wall Street analysts? They are also regarded as elites of the financial industry thanks to their top educational backgrounds, high IQs, decent pay, and perhaps, smart looks.

Examining companies by studying their financial statements, earnings calls, industries, economies, and many other factors, this crowd provide stocks recommendations and can sometimes change the public opinion of a company to such extent that its share price may shift accordingly.

So should anyone rely on stock recommendations from Wall Street analysts? A back-testing will help answer the question.

Urbem Street Bullish Score

As the first step, I developed a ranking model to assign a score to each stock, reflecting the "bullishness" of the Street as of a certain point of time, by taking the following factors into account (weightings in descending order):

  • The upside (if any) of the average price target.
  • The upside (if any) of the low and high ends of price targets.
  • The most recent average price target vs. four weeks ago.
  • The number of analysts who give price targets.

I call the final score the "Urbem Street Bullish Score," which calculates the weighted sum of the above respective ranks. As you can imagine, the higher the score, the more bullish Wall Street analysts are on the stock in aggregate. Below are the 50 U.S.-listed stocks with the highest Street Bullish Scores (calculated by Portfolio123) as of May 4:

Rank Ticker Name 100% Stock Rank
1 MGI MoneyGram International Inc 98.45
2 BMA Banco Macro SA 98.27
3 VIPS Vipshop Holdings Ltd 98.24
4 TRNX Taronis Technologies Inc 98.23
5 JD Inc 98.11
6 BRS Bristow Group Inc 97.99
7 TRIL Trillium Therapeutics Inc 97.95
8 LX LexinFintech Holdings Ltd 97.91
9 ZTO ZTO Express (Cayman) Inc 97.55
10 HTHT Huazhu Group Ltd 97.5
11 BABA Alibaba Group Holding Ltd 97.47
12 YNDX Yandex NV 97.39
13 ROSYY Rostelecom PJSC 97.24
14 NVO Novo Nordisk A/S 97.23
15 TCEHY Tencent Holdings LTD 97.12
16 WF Woori Financial Group Inc 97.11
17 BZUN Baozun Inc 97.1
18 FHL Futu Holdings Ltd 96.98
19 BEDU Bright Scholar Education Holdings Limited 96.97
20 BILI Bilibili Inc 96.92
21 APVO Aptevo Therapeutics Inc 96.87
22 GHG Greentree Hospitality Group Ltd 96.85
23 CRBP Corbus Pharmaceuticals Holdings Inc 96.6
24 NIU Niu Technologies 96.58
25 CKPT Checkpoint Therapeutics Inc 96.57
26 PAGS PagSeguro Digital Ltd 96.54
27 ALPE Alpha-En Corp 96.54
28 HUYA HUYA Inc 96.43
29 BYSI BeyondSpring Inc 96.35
30 ARDX Ardelyx Inc 96.31
31 GDS GDS Holdings Ltd 96.29
32 TAK Takeda Pharmaceutical Co Ltd 96.13
33 PTI Proteostasis Therapeutics Inc 96.08
34 ATNM Actinium Pharmaceuticals Inc 96.05
35 RDY Dr. Reddy's Laboratories Ltd 96
36 OVID Ovid Therapeutics Inc 95.98
37 JT Jianpu Technology Inc 95.92
38 VIVE Viveve Medical Inc 95.87
39 FEDU Four Seasons Education (Cayman) Inc 95.84
40 LN LINE Corp 95.81
41 YTRA Yatra Online Inc 95.81
42 UPL Ultra Petroleum Corp. 95.72
43 ZEAL Zealand Pharma AS 95.69
44 SNNA Sienna Biopharmaceuticals Inc 95.67
45 SNGX Soligenix Inc 95.65
46 EYEG Eyegate Pharmaceuticals Inc 95.63
47 KB KB Financial Group Inc 95.59
48 LAIX LAIX Inc 95.55
49 LENSF Presbia PLC 95.53
50 SPHS Sophiris Bio Inc 95.5

Source: Portfolio123; data as of May 4, 2019.

From the list, you may recognize many hot Chinese tech names, such as, Bilibili and Baozun. If we limit the scope to only U.S. large caps, which people are more familiar with, below is the result of running the scoring model across the S&P 500 constituents:

Rank Ticker Name 100% Stock Rank
1 PXD Pioneer Natural Resources Co 92.9
2 MRO Marathon Oil Corp 92.23
3 FANG Diamondback Energy Inc 91.42
4 CXO Concho Resources Inc 89.57
5 JEF Jefferies Financial Group Inc 89.29
6 EOG EOG Resources Inc. 87.09
7 NBL Noble Energy Inc 86.95
8 DXC DXC Technology Company 86.92
9 TPR Tapestry Inc 86.83
10 CPRI Capri Holdings Ltd 86.77
11 VLO Valero Energy Corp 85.71
12 HAL Halliburton Co 85.12
13 COP ConocoPhillips 84.77
14 NKTR Nektar Therapeutics 84.6
15 NEM Newmont Goldcorp Corp 84.49
16 MOS Mosaic Company 84.24
17 XEC Cimarex Energy Co. 84.11
18 MPC Marathon Petroleum Corp 83.27
19 CI Cigna Corp 83.03
20 PSX Phillips 66 82.98
21 FCX Freeport-McMoRan Inc 82.23
22 SLB Schlumberger Ltd 82.07
23 MGM MGM Resorts International 81.87
24 JWN Nordstrom Inc. 81.42
25 CNC Centene Corp 81.09
26 ANTM Anthem Inc 80.93
27 PWR Quanta Services Inc. 80.93
28 CBS CBS Corp 80.86
29 HUM Humana Inc. 80.74
30 LYB LyondellBasell Industries NV 80.46
31 CVX Chevron Corp 80.39
32 DAL Delta Air Lines Inc 80.39
33 AGN Allergan PLC 79.71
34 VIAB Viacom Inc 79.18
35 REGN Regeneron Pharmaceuticals Inc 79.17
36 BHGE Baker Hughes a GE Co 78.99
37 HCA HCA Healthcare Inc 78.75
38 CVS CVS Health Corp 78.62
39 EIX Edison International 78.44
40 GILD Gilead Sciences Inc 78.34
41 FLR Fluor Corp 78.16
42 FTI TechnipFMC plc 78.02
43 LKQ LKQ Corp 77.89
44 DVN Devon Energy Corp 77.83
45 OXY Occidental Petroleum Corp 77.76
46 DWDP DowDuPont Inc 77.32
47 CTSH Cognizant Technology Solutions Corp 77.15
48 ALB Albemarle Corp 77.1
49 UNH UnitedHealth Group Inc 77.01
50 AMZN Inc 76.76

Source: Portfolio123; data as of May 4, 2019.

Among all companies above (the ones that Wall Street is most bullish on), it would be a pretty rare case to earn a high "Quality Score."

Urbem Street Bullish Index

Now here comes the fun and crucial part: the backtest. To do it, the following index formation methodology is implemented:

  • A mildly concentrated portfolio consisting of 50 U.S.-listed stocks.
  • Rebalancing once every 26 weeks to include, with equal weights, the 50 stocks with the highest Street Bullish Scores.
  • Excluding penny or illiquid stocks (i.e., price of less than $1 or past 20-day average volume less than 20,000) or companies covered by fewer than two analysts in terms of price target.

I then ran the above rules against all U.S.-listed stocks to build the Urbem Street Bullish Total Market Index. The performance looks miserable for the past 15 years (see below), annualizing at only 1.02%. The annual turnover is 144.13%, and the max drawdown is -78.94% (vs. -55.24% for the benchmark). Between 2004 and 2018, there were only six out of 15 years when the Street Bullish Index outperformed and the analyst price targets provided value on average for investors.

Please note that no trading cost or management fee is included in the performance, which is not the case for the benchmark, Vanguard Total Stock Market ETF (

VTI, Financial).


Source: Portfolio123; data as of 5/6/2019.


Source: Portfolio123; data as of 5/6/2019.

To break it down (as seen below), the current majority of the stocks in the index are small and micro companies, while the health care sector has a share of more than 50%.


Source: Portfolio123; data as of 5/6/2019.


Source: Portfolio123; data as of 5/6/2019.

With the same mechanism, I also built this Urbem Street Bullish US Large-Cap Index to backtest against the S&P 500 universe with more (and hopefully higher-quality) Wall Street coverage there.

While the absolute performance is better, the Street Bullish Index still could not beat the benchmark, SPDR S&P 500 ETF (

SPY, Financial). The annual turnover (137.18%) and max drawdown (-72.53%) are both slightly lower than the total market index.


Source: Portfolio123; data as of May 6, 2019.

Still, as indicated below, there were only six out of 15 years when the Street Bullish Index managed to beat.

3254211-15572027323239427.pngSource: Portfolio123; data as of May 6, 2019.

At the moment, the Street Bullish Large-Cap Index overweighs energy, tech and financial (see below), compared to its total market counterpart.


Source: Portfolio123; data as of May 6, 2019.


Like all other quantitative methodologies, backtesting has its limitations. The main one, in our case (to test the value-add of analysts price targets), is due to it being backward-looking. A backtest purely considers the evidence from the past, but market dynamics could change in the future. For example, it could be the case that Wall Street analysts in aggregate would, with the help of technologies, improve their results (especially regarding currently under-covered stocks), which are not reflected enough in the market, creating some market inefficiencies (although I do not see this coming very soon).


At least for the past 15 years, a strategy built based on Wall Street analysts' recommendations would have performed poorly compared to a buy-and-hold, passive-investing approach. Even worse, the strategy would very likely cause more drawdown as part of the downside risk.

One prevailing explanation for this is that Wall Street is relatively shortsighted, while the stock market, being a voting machine for the short run and filled with highly competent players, is quite efficient. The price "guessing game" could be another example demonstrating that "competition is for losers."

It would be a wise approach for investors to stay away from the "noise" on the Street and stay focused on the long-term fundamentals of businesses.

Read more here:

Secular Growth: The Ultimate Reinvestment Opportunity

The True Competitive Advantages of Berkshire Hathaway

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