What Was The Only Top Ten Buy-rated FTSE Stock To Make A Positive Return In 2018?

Russ Mould, investment director at AJ Bell, looks at how the FTSE 100 stocks most rated a 'buy' or 'sell' last year performed in 2018 and the analyst ratings for 2019.

2018 proved a tricky year for investors and it wasn’t just retail investors that struggled. The research written by analysts at the leading investment banks and broking firms also failed to identify the winners and losers.  

Granted, this is primarily intended for institutional investors but it is possible to find a summary of how many analysts cover a stock and how many rate the stock a buy, sell or hold and this can be a way for retail investors to at least narrow down an index as broad-ranging as the FTSE 100.

However, a back-test of the data on the most and least popular stocks at the start of 2018 suggests this research needs to be treated with kid gloves.

To cap it off, the stocks that analysts most actively disliked, as evidenced by the number of 'sell' ratings, did marginally less badly than the FTSE 100, although in fairness only one recorded actual share price gains.

While it is tempting to cut analysts some slack by noting that 2018 was a tough year, this is the fourth time we have conducted this analysis – and the analysts' combined top picks fared no better than the benchmark index in 2015, 2016 or 2017.

This is not to gratuitously kick the analysts when they are down. But it does suggest the real value of broking research lies not with the recommendations but with the industry analysis and distillation of the key company issues that it provides. 

It can give retail investors a framework that summarises current market knowledge of a stock, what factors may influence it and (perhaps most importantly, for the short-term at least) consensus forecasts.

Whether investors decide to do further research on these names – or avoid them like the plague – may depend upon their view of the value of the analysis provided.

But anyone prepared to pick their own stocks rather than pay a fund manager or index-tracker fund to do it for them must still thoroughly research any company for themselves before they even think about buying its shares. 

If this sounds difficult, well, it is but at least investors can follow the lead of successful American investor Charlie Munger – Warren Buffett's vice chairman at Berkshire Hathaway – who boils it down to four things:

• Do you understand the business?

• Does the business have intrinsic value or durable competitive value?

• Does management have integrity?

• Does the stock come at a reasonable valuation?

Equally, if an investor likes what they see, they should not be put off just because they are out of step with consensus – they may have unearthed a nugget of value, assuming the stock passes the first three of Munger's tests.

Then they may be heeding Buffett's maxim that 'you can't buy what is popular and do well'.