Beware of analysts’ reports

NEW YORK – Despite public humiliation for a handful of analysts and a $1.44 billion settlement in 2002 involving 10 Wall Street firms’ research operations, investors still read analysts’ reports, and they still believe them. Analysts’ recommendations still move stocks.

The fourth-quarter earnings season was a great lesson in how often analysts’ predictions are wrong. Of the S&P’s 500 companies, 204 reported earnings that were higher than expected by 5 percent or more, while 60 companies reported earnings that were below expectations by 5 percent or more, according to Zacks Investment Research Inc.

The reports have other flaws investors should keep in mind:

• Analysts are still overwhelmingly positive.

Zacks ran the numbers on the average broker rating of the 4,527 companies it follows; 42 percent of the companies had an average rating of “Buy” or “Strong Buy.” Only 3 percent had ratings of “Sell” or “Strong Sell.”

• Consider the source.

The banks that negotiated the 2002 settlement over their biased stock ratings may have changed their behavior, to a degree. “Hold” rankings on stocks have soared, while “Buy” rankings have dropped.

• Look for revisions.

The overwhelmingly positive nature of analyst ratings makes a downward revision in a company’s rating more notable.