Researchers pored through a years worth of Benzinga Analyst Ratings data, looking for signals. Data specialists at investment dashboard provider Toggle.ai uncovered that the analyst insights Benzinga Pro subscribers and Benzinga readers regularly receive can successfully be used as trading indicators to outperform the stock market.
"In the same way Benzinga originates news for its readers, we love originating data by looking at the world differently than others," said Benzinga Vice President Luke Jacobi.
"Innovation in data is critically important, especially for individual investors who aren't privy to the level of analysis afforded to large institutions."
Analyst reports and ratings are valuable sources of high-quality stock research and analysis for traders. Financial analysts are typically experts on the handful of stocks they cover.
They conduct deep dives into individual companies, including financial statements, listening to and participating in company conference calls, meeting with customers and investors and modeling a stock's value based on discounted cash flows or other fundamental metrics.
Analyst Ratings As Trading Indicators: The Toggle.ai study included 34,049 analyst ratings and rating revisions from 169 research houses covering 4,636 stocks, all of which were provided by Benzinga to its readers and subscribers over a one-year period from Jan. 1, 2021 to Dec. 31, 2021.
Toggle.ai focused on both the analyst ratings themselves and the price targets associated with the ratings. The firm looked at price action based on analyst upgrades and downgrades (I1), as well as distance between a stock's current market price and an analyst's updated target price (I2). Finally, Toggle.ai explored the difference between an analyst's updated price target for a stock and his or her previous price target (I3) as a potential trading signal.
For each of the three strategies, Toggle.ai tested a range of entry and exit percentages based on the analysts' target prices.
Study Results: The firm found that changes to an analyst's price target are the most accurate trading signal, with success rates ranging from 52.5% to 55.5% for 16 combinations of I3 entry and exit strategies. Overall, the I3 indicator had a statistically significant average success rate of 54.3%.
Toggle.ai then applied its I3 indicator to each of the top 15 analyst firms Benzinga covered throughout 2021 to see which firms' analysts had the best performance.
The researchers found a top success rate of 70.1% among KeyBanc Capital Marketsanalysts followed by a 69.5% success rate for Wells Fargo analysts and a 67.8% success rate in trading Citigroup analysts.
Toggle.ai also applied their I1 and I3 strategies to individual analysts and found that Raymond James analyst David Long's ratings were the most reliable trading indicators. Long's 26 stock ratings throughout the year generated an 88.4% success rate utilizing the I3 strategy and an 84.4% success rate utilizing the I1 strategy.
Morgan Stanley analyst Devin McDermott and Credit Suisse analyst John Walsh's ratings also demonstrated a greater than 79% success rate utilizing the I3 trading strategy.
Toggle.ai also looked at so-called ratings "clusters," a term used to highlight the fact that groups of analysts tend to change their ratings and price targets all at once within a day or two of each other.
Researchers found that traders should pay more attention to analysts who are first or the only ones to change their rating on a given stock in a given period of time.
"The data suggests that analysts who change their targets independently are more successful than those who might be changing their recommendations because its the consensus thing to do," said R.J. Assaly, chief product officer at Toggle.ai.
Accessing Benzinga's Analyst Ratings Data: Any Benzinga reader can access the latest analyst ratings on the Analyst Stock Ratings page here. Readers can sort by stock ticker, company name, analyst firm, analyst accuracy, rating change or other variables. Active day traders can also sign up for a free trial of Benzing Pro to access Benzinga's real-time Newsfeed, Analyst Ratings Calendar and a number of other valuable features.
Benzinga's Analyst Ratings API is a collection of the highest-quality stock ratings curated by the Benzinga news desk via direct partnerships with major sell-side banks. Benzinga displays overnight ratings changes on a daily basis three hours prior to the U.S. equity market open.