“A Prayag and P van Rensburg (2006) “The Value of Analyst’s Concensus Recommendations”, Investment Analysts Journal , vol 63, 5-17”

Abstract: This paper investigates whether the analysts‟ consensus recommendations from South African brokerage houses were of value to investors over the period from March 2000 to April 2003. If an investor strictly follows analysts‟ consensus recommendations of shares listed on the JSE, only the buy recommendations result in a significant alpha, estimated under a two-factor APT model of 0.99% over a one-month holding period. The hold and sell recommendations produce insignificant results under all performance measures. The implication for the potential investors in the stock exchange is not to base their investment decisions solely on the level of analysts‟ consensus recommendations. Several investment strategies designed to take advantage of changes in or recurrences of analysts‟ consensus recommendations are investigated and they show considerably more promise. If an investor acts on the recurrences (reiterations of a firm‟s recommendation over two successive months) of hold and buy recommendations, positive two factor APT alphas of 2.47% and 3.74% respectively are earned over a three-month holding period. A high positive APT alpha is earned by holding shares for three months that reappear as a buy recommendation after previously being dropped from coverage. Shares that have reappeared as a sell recommendation earn a significant market-adjusted return of –14.58% for a one-month holding period. Both of the latter findings are based on small sample sizes. Surprisingly, the recurrences of sell recommendations yield significantly positive abnormal returns over a three-month holding period. Shares for which a sell recommendation is discontinued, earn a significant positive alpha of 13.57% for a one-month holding period. Also, shares that are covered for the first time by analysts and appear as a buy recommendation yield a significant market-adjusted return over a two-month holding period of –8.05%. However, it should be noted that the above findings are also based on a very small sample. It is found that an investor generally earns significantly higher returns by acting on downgrades instead of strictly following the level of South African stock-broking firms‟ analysts‟ consensus buy, hold and sell recommendations. Over a two-month holding period, shares with a change from a hold to a sell recommendation achieve an abnormal return of –10.72%. In addition, shares with a change from a buy to a hold recommendation also earn negative market-adjusted and abnormal returns over one and two-month holding periods.

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