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October 16, 2007 - Slim Pickings Among Stock Picks of Columnists?

Are the stocks recommended by columnists in major business magazines good short-term and/or long-term picks? Can one trade these stocks around the publication event? In their 2006 working paper entitled "The Value of Columnists' Stock Recommendations", Dan Palmon, Ephraim Sudit and Ari Yezegel assess the short-term and long-term performance of buy recommendations made by columnists in Business Week (BW), Forbes and Fortune. Sensitive to the fact that magazine availability dates differ from nominal publication dates, they use a range of benchmarks and risk adjustments to measure the abnormal returns of these picks. Using 2,503 buy recommendations from the three magazines made during 2000-2003 along with associated price, fundamentals and benchmarking data, they conclude that:

• The choice of benchmark is critical to assessing performance of the recommendations. The columnists themselves tend to use a simple comparison to the S&P 500 index, ignoring commonly applied risk factors (market, size, value and momentum) and portfolio weighting (equal versus value).
• From five trading days before to one trading day before public availability, there are significant average cumulative abnormal returns for BW (0.52%) and Forbes (0.44%) but not Fortune (0.17%) buy recommendations. (See the first chart below.)
• From the day before through the day after public availability, BW buy recommendations exhibit unusually high volume and large average abnormal returns (2.48%), while those for Forbes and Fortune show no volume impact and much smaller abnormal returns.
• The large abnormal returns of BW buy recommendations around the availability date tend to reverse over the next couple of weeks. This reversal suggests that publicity, not stock picking savvy, drives the returns.
• Over the next few months after public availability, Forbes buy recommendations tend to outperform those of BW and Fortune. (See the second chart below.)
• One year after public availability, none of the three magazines offer significant average abnormal returns from the buy recommendations of their columnists.
• In the short-term, recommendations directly from columnists significantly outperform those made by others and endorsed by columnists. In the long-term, there is no significant difference in average performance between direct and indirect recommendations.

The following chart, taken from the paper, displays the cumulative average abnormal returns from 15 trading days before to 15 trading days after the public availability date (Day 0) for buy recommendations from all three magazines. The benchmark for calculation of abnormal returns derives from a very broad, equally-weighted selection of stocks. The chart shows the large but transitory effect on returns of publication of recommendations in BW columns, suggesting a substantial publicity effect. Results for recommendations in Forbes and Fortune columns do not show such an effect. The best play for traders may be to short BW recommendations a few days after availability and hold for a few weeks.

The next chart, also from the paper, shows the longer-term cumulative average abnormal returns during the 60 trading days after the public availability date (Day 0) for buy recommendations from all three magazines. The benchmark for calculation of abnormal returns derives again from a very broad, equally-weighted selection of stocks. The chart shows that the recommendations from Forbes columns on average roughly match the benchmark, while those from columns in BW and Fortune significantly underperform.

In summary, the buy recommendations of columnists in prominent business magazines on average underperform an equal-weighted benchmark over the weeks, months and first year after publication. Columnists in Forbes tend to outperform those in Business Week and Fortune.

For related research, see Blog Synthesis: The Wisdom of Analysts, Experts and Gurus. See also our blog entry of 10/1/07 for a similar analysis of Jim Cramer's stock picks.

Some of the columnists covered in this study are represented in Guru Grades.