By Ben Levisohn

Navigating the wild twists and turns of the stock market this year hasn't been easy. Wall Street's analysts haven't been much help.

Chaos rules. Winners have become losers, losers are leading, and the S&P 500 gave back a big chunk of its January gains in February. Despite the volatility, 98 stocks in the index gained 10% or more through Wednesday's close, while just 43 have suffered double-digit declines, suggesting there is room for stockpickers to add value -- if they pick the right stocks. Big winners included Super Micro Computer, CVS Health, and Tapestry, while the biggest losers included Edison International, West Pharmaceutical Services, and Deckers Outdoor.

Analysts, as a whole, weren't fans of the biggest losers. The percentage of Buy ratings on the 43 names was 46.6%, according to FactSet data, below the average stock's 55%. Unfortunately, the average percentage of Buy ratings on the biggest winners was only 47.2%. What's more, the two biggest losers -- Edison and West Pharmaceutical -- had 55% and 67% Buy ratings, respectively, while the biggest winner, Super Micro, had just 30% Buy ratings, and CVS, which came in No. 2, had 55%.

That's all par for the course. Trivariate Research's Adam Parker notes that the stocks most loved by Wall Street analysts have underperformed those that they hate by 30 percentage points since 2001, with periods of sharp underperformance followed by outperformance before reversing again. Upgrades and downgrades can produce large one-day moves, but improvement in ratings doesn't translate into better performance.

It goes on. Stocks with the biggest gaps between their current prices and their average price target outperformed from 2009 through 2016, but these days it's more likely to be a sign that analysts were bullish on a stock that went on to drop. Analysts also tend to have more Buy ratings on high-beta stocks -- the market's most volatile -- which can come back to bite investors during periods of risk-off trading.

The one signal that appeared to lead to outperformance is when all the analysts have price targets in the same ballpark, but even that has begun to work less well, according to Parker's data. And, as he writes, "A signal that is cumulatively ineffective and volatile is not a signal investors should use for stock selection."

But maybe we're thinking about the problem all wrong. Personally, I love analyst research reports. In my previous life as a trader, I made money playing the swings produced by upgrades and downgrades, even if those ratings changes didn't have a prolonged effect on the stock. As a journalist, analyst reports are essential for me to keep up with what is happening in individual stocks and help me spot new concerns or catalysts. And it's always worth paying attention when an analyst breaks from the herd -- I still remember J.P. Morgan's Stephen Tusa becoming the first Sell-rated analyst on General Electric long before investors caught on to just how bad things had gotten at the once-dominant industrial giant.

It's also beneficial to think about what analysts have gotten wrong. Take Microsoft, a stock Wall Street simply loves. Its shares have fallen 2% over the past 12 months, making it the worst performer among the Magnificent Seven stocks over the period. That's likely not what analysts had in mind when 94% of the 57 covering it at the end of March 2024 rated shares a Buy with an average price target of $472.62. The subpar performance hasn't dampened the enthusiasm for Microsoft -- at least not by much. As of Wednesday's close, 93% of the 58 analysts covering the stock still rated it a Buy with an average target price of $510.22, up 28% from a recent $399.73.

Analysts had been expecting Microsoft's tie-up with OpenAI to give it a leg up in artificial intelligence, while the rush into AI would increase demand for its cloud business. Instead, AI has increased costs -- Microsoft's capital spending rose 58% to $44.5 billion in 2024 -- while revenue from Azure, the company's cloud business, came in at the low end of guidance. Without analysts, however, I wouldn't know that the problem in the cloud had little to do with AI, while Microsoft also offered a better-than-expected margin forecast.

Analysts, naturally, still love the stock. BofA Securities' Brad Sills, for instance, calls Microsoft a "rare winner." If the company can execute better, the demand for AI and the cloud should help it get back to "a more consistent beat and raise pattern as we move through the year, " Sills writes. "We continue to believe that Microsoft remains uniquely positioned to monetize the vast new AI opportunity across applications and infrastructure at scale."

It's an interesting idea, one that looks more compelling with the stock trading near the bottom of the range it has been stuck in for the past year. Unlike other members of the Mag 7, it doesn't have big gains to give back. And the stock, at 27.8 times 12-month forward earnings, is near the bottom of its price/earnings range over the past five years. Since Microsoft is range-bound, a stop-loss order at, say, $385 would allow you to exit with a minimal loss if support breaks.

Give the analysts a break. Ultimately, it isn't about the research -- it's what you do with it.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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February 28, 2025 01:30 ET (06:30 GMT)

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