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Unadmired Stocks Beat Admired Ones?

Posted in Investing Expertise, Sentiment Indicators

Are the most admired companies the best investments? Or, is current state of admiration a contrarian indicator for future returns? In their January 2010 paper entitled “Stocks of Admired Companies and Spurned Ones”, Deniz Anginer and Meir Statman use Fortune magazine’s yearly survey-based lists of “America’s Most Admired Companies” to answer these questions by measuring the returns (April 1 through March 31) of two portfolios reformed annually: admired companies (upper half of survey scores), and unadmired companies (lower half of survey scores). Survey respondents are senior executives, directors and securities analysts, and the questions asked seemingly relate indirectly or directly to the investment value of the companies named. Using these lists for April 1983 (survey inception) through March 2007 and associated stock return data, they conclude that:

  • Over the entire sample period, the mean annualized equally-weighted (value-weighted) return for the unadmired (lower half) portfolio is 18.3% (16.1%), compared to 16.3% (13.8%) for the admired (upper half) portfolio.
  • Risk-adjusted alphas of an annually reformed hedge portfolio that is long (short) the unadmired (admired) stocks is sometimes positive and sometimes insignificant, depending on whether the risk adjustment is beta only or multi-factor.
  • Increases in admiration generally indicate lower future returns. For example, the mean annualized equally-weighted return of the stocks in the most unadmired quartile for which reputation decreased (increased) relative to the median is 18.8% (13.2%).
  • The dispersion of returns is higher within the unadmired portfolio than the admired one. Among the 12 stocks with the worst (best) annual returns, 11 (9) come from the unadmired portfolio. Investors seeking to exploit “unadmiredness” should therefore diversify widely among unadmired stocks.
  • The effect is non-linear. The annualized return of an equally-weighted portfolio of the 10 least (most) admired stocks is 13.4% (16.6%). The next ten most and least admired stocks have about the same annualized return. However, for rankings 21-30, 31-40 and 41-50, unadmired stocks substantially beat admired stocks.

In summary, the stocks of companies unadmired by the ostensibly well-informed may well outperform the stocks of the companies admired.

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