Do analysists' consensus recommendations have an investment value? A study conducted on the 20 stocks included in the BEL20 index

Abstract

Brokerage firms and investment banks spend large amounts of their income on security analysts whose function it is amongst others to review securities and issue recommendations. This paper aims to review the value that lays within these recommendations, particularly those of the 20 stocks included in the BEL20 Index. To do so, calendar time portfolios are constructed based on the consensus ratings of the 20 stocks. Later on, their performance is analyzed with return and risk-adjusted return measures. The findings indicate that the most favorable recommended stocks achieve the highest monthly return figures and the stocks with the lowest ratings earn the lowest returns. The monotonic decrease in returns while the rating of the stocks worsens supports the claim that analysts’ consensus recommendations present valuable information and guide investors into the right direction. To further investigate this, investment strategies based on the obtained results have been constructed and show that a long-only strategy investing in the quartile of most recommended stocks is most profitable. Additionally, the value of changes in recommendations and the influence of investors’ sentiment (measured by the VIX) has been investigated. It shows that changes of recommendations share a similar predictive value as absolute levels, but consensus recommendations coupled with data on investors’ sentiment has a greater predictive power.