Could investors obtain returns using analysts' recommendations?

This book examines the value of stock recommendations issued by financial analysts for the the period 1994-2003, using data from JCF Quant. In every month of the sample period, stocks are classified into three portfolios, and studied first by consensus recommendation level and then by changes of consensus level. Returns from the recommendation portfolios are estimated using different models in the context of the portfolio calendar-time methodology. The results obtained show that sell-side analysts are able to detect profitable investment opportunities. Investors may obtain significant positive risk-adjusted abnormal returns constructing a hedge portfolio, buying the best-recommended assets and simultaneously selling the worst consensus stocks. However, a portion of these returns could be attributed to their tendency to recommend the acquisition of big "value" stocks and the sale of small shares with negative price momentum. Finally, the value of an analyst's recommendations is independent of the level of information on the firm, expressed by company size or the number of analysts covering each firm.