One of the most thrilling and scary things you can do with your money is to buy individual stocks.
I like to hold a small portion of my investments in individual stocks because I have found it to be a very useful component to my overall plan for financial freedom (my money design as I call it).
Plus I’ve been investing for a long time so I have a pretty good idea of what to do.
Unlike when you own a mutual fund, you lose the safety and security of owning 100’s of stocks at one time when you buy pick and buy stocks one a time. (Of course the experts have also said that you really only need 10-12 stocks to be adequately diversified).
But then there’s a pretty lucrative up-side to stock investing: Your winners could be unbound! How great would it be to own a stock that double or even grows 10X in value in one year?
Last year when I was looking for good stocks to invest in and choose to buy shares of Pitney Bowes (PBI), I eventually sold it after it grew by 109% in value! Not bad, right?
How Do You Know Which Ones Are Good Stocks to Invest In?
Google “how to pick stocks” and you’ll get more than conflicting information than you’ll know what do with.
That’s because no one can really agree on how to pick stocks. Everyone is an expert – everyone has their own opinion or way of doing it. Even my method may be totally different from yours ….
This is probably one of the most frustrating aspects of finding stocks to invest in. If everyone is saying something different, then what is the right way to pick them out? With all the thousands of options out there and all the supposed metrics you’re told to look at, how are you to know if you’ve found a winner or a total lemon?
In this post, we’re going to do something fun with it.
Let’s see if we can make finding good stocks to invest in easier on ourselves by letting someone else do it for us: Using analyst opinions.
What Are Analyst Opinions?
In case you didn’t know it, just about every major media website with a financial section has some form of an “analyst opinion” section that you can use to compare stocks.
Basically what they do is collect opinions from different investment firms, combine those opinions into some kind of weighted metric, and then publish it as “their recommendation” to either Buy, Sell, or Hold the asset.
Sounds like a sure thing, right?
Well, hold on. It’s not that easy. Just like what we said above, there are a lot of times when even the analysts don’t agree. One website may tell you to Buy while the other one may say to definitely sell!
So again – how are we supposed to know what to do?
Let’s use a little bit of logic to help shape our stock picking game:
- These analysts are experts. They probably know how to pick stocks a little bit better than the average person like you and I. In fact it’s been published that when analysts said to Buy a stock, they were right 70% of the time.
- Sure it’s a dumb idea to go off of just one opinion. But what about 3 or 4? What if several analyst opinions all agree to buy the same stock? Would you then be more persuaded to part with your money?
Where Will the Stock Analyst Opinions Come From?
For this example, we’ll be using the following major websites to collect analyst opinions for our stock picks:
- CNN Money
- Yahoo Finance
- MSN Money’s Stock Scouter
- Fidelity – As a Fidelity customer, I have access to their stock research and information.
My Stock Picks and Scoring the Analyst Opinions:
To keep this post from being a short Ebook in length, let me start off the case study by telling you that I’ve already bought and purchased my stock picks for the year in late January.
A Brief Recap of My Stock Picking Strategy:
In case you’ve never read any of my posts on how I pick good stocks to invest in, basically let me sum it up like this: I only buy stocks from two very obvious places:
- The Dogs of the Dow
- The Dividend Aristocrats
Why these two categories? For a stock to make it into either (or both) of these groups, it has to have displayed some exceptional talent over the years.
- The Dow Jones Industrial Average constitutes the top 30 industrial stocks in the US. Think about if you were looking to pick classmates for a game of dodge ball. Basically stocks in this group would be like picking the biggest and best ones!
- The Dividend Aristocrats are a group of stocks who have raised their dividend payments to their shareholders every year for the past 25 years. Again, to have done this, your company must be doing something right!
From there I look at a lot of other qualities about the stocks like industry, dividend yield, dividend payout ratio, PE ratio, forward PE, return on assets, etc. Feel free to click on any of the links for each of these aspects to find out more about why I value them. I’ve also put together a really nice introduction on how to read basic stock metrics here.
Onward to the Analyst Opinions:
So now that we have the list of stocks I bought, let’s go to each of the websites above and collect the analyst opinions.
Because I knew this would make a great topic for a blog post, I recorded the analyst opinions at the time of my stock purchase.
Here’s a brief summary of what you’ll find:
CNN: They give you a high, median, and low stock price outlook over the next 12 months relative to the current share price. Ideally it would be great if all three of these metrics where higher than what the stock is at now! Here’s how I’ll record the results:
- +3 if all three are well above the current price.
- 3 if the “low” option is just above the current price.
- 2 if only the median and high price are above the current price.
Yahoo: Yahoo gives a value between 1 and 5 where 1 is a strong buy and 5 is a strong sell.
MSN: MSN’s Money Stock Scouter gives a score between 1 and 10 where 10 is a strong indication to buy and 1 is a sell.
Fidelity: Fidelity also has a 1-10 system where 10 is a strong buy.
How Did Our Stock Portfolio Do? Where Are We At Now?
So I know you’re anxiously awaiting the results. Here they are.
I know. I know. This is only 2 months worth of data. These analyst opinions are forecast for the next 12 months.
However some of these didn’t have a bad return. So just for the fun of it, let’s slice and dice the data to see where we’re at so far:
- CNN had 3 strong picks that have done really well so far: Grainger, McCormick, and AT&T. Their high scores for Aflac and Verizon still need some work.
- Yahoo was pretty mediocre on every single one of my stock picks except PPG Industries, which returned a modest 2.6% so far. It was hard to tell if they were right or wrong about anything.
- MSN was really optimistic about Aflac, Cisco, McCormick, PPG Industries, and Verizon. However only three of those picks are in the green at the moment. Ironically none of my picks were deemed by MSN as sure losers like the other experts. That’s an opinion that seemed to work out 8/10 times.
- 4 of Fidelity’s top picks were in the green. Most notably they were the only one who was hot on Johnson and Johnson, the highest returning stock out of the group. Fidelity was also sour on McCormick and AT&T, two stocks that have done exceptionally well during this time.
Readers – So what do you think all this data tells us? Were the analysts right about which companies were good stocks to invest in? Or is it too early to tell?
I plan to continue this case study for the next 12 months and see how we do. If nothing else, it will be fun to see which experts get it right and which ones do the worst.
1) How to Find Good Cheap Stocks to Invest In – A Book Review
2) One Man’s Success With Borrowing Against 401k Funds for a Comeback
3) My Broker Lets Me DRIP Stocks – Why That’s Great
Images courtesy of FreeDigitalPhotos.net
John @ Sprout Wealth says
Nice post MMD! I think it’s a bit too early to tell for the year, especially with how the market has been acting the past few weeks. That said, I think you have some solid stocks there – at least in my opinion. 🙂 I’ve found the same thing myself with Yahoo Finance in the past. I love using it as a resource of information, but their opinions I tend to take with a bigger grain of salt.
[email protected] says
I am a boring index fund investor. I just don’t have the will or desire to research individual stocks!
David @ Simple Money Concept says
Boring is good. “If it ain’t broken, don’t fix it!”
DC @ Young Adult Money says
Very interesting analysis, but I think it’s too soon to tell. I’ll be interested to see where these picks are at 12 months from now. I know a lot of people suggest just picking index funds, but I think it’s definitely possible to pick stocks that will outperform the market.
Also, nice site redesign! I desperately need one and have needed one for quite some time now.
I think you’d have to give it a year to decide, but I’m kid of with Holly and would rather just pick index funds. I do like seeing how people’s picks do for the year, though.
Brian @ Luke1428 says
That will be very interesting to see how that turns out. Aside from all the stock metrics and analysts opinions, I’ve always felt a key criteria in selecting an individual stock is to buy one you know. In other words, one in which you understand the business model and how the company makes their money. If someone asks me “What does Apple or Ebay do…how do they make their money?” I could easily tell them.
Marie @ 724 Credit says
I think yes they can, but it’s too risky. Shares can go up and down day by day.
Derek at MoneyAhoy says
Isn’t the stock market up approximately 70% of the time? I think it’s all complete hogwash that the analysts are any better than anyone else in picking stocks. When you analyze data over long periods of time (20 – 30 years), all of the analysts perform incredibly poorly. Who cares if they hit a slam dunk over a 2-3 month period?
If they really were great at picking stocks for the long term, do you think they would publish that information to you and me for free? Of course not, they’d keep it to themselves and get wealthy. Analyst are there for one reason – to increase churn and turn us into traders vs. investors!
I’m with Holly – long term boring market index funds are the best way to go to build your wealth 🙂
Jon @ Money Smart Guides says
I agree with John above that it’s too early to tell. You have to see how things play out over the longer term. Two months is just too short of time period to make a solid conclusion.
Derek @ MoneyAhoy.com says
Fully agree as well – things could gyrate dozens of times depending on the week you look. 5 or 10 years is a good an meaningful comparison.
I like to focus on the dividend aristocrats when I pick individual stocks. I’m not buying for the appreciation in the stock price itself but for the passive income stream that the dividends would provide. The way I see it, even if the stock price remains relatively constant, I will continue to earn 3% or so as an income stream. That works for me.