Forecast accuracy and stock recommendations

We examine whether it is profitable to trade according to the recommendations of analysts who made accurate earnings forecasts in a prior year. Prior research has shown that analysts who made the most accurate earnings forecasts in the current period also made the most profitable recommendations during that period. Unfortunately, our research shows that these accurate forecasters cannot be identified on the basis of their track record. While there is statistically significant evidence that forecasting ability is persistent, it is not sufficient to generate profitable stock recommendations in the future. We also attempted to identify superior analysts with respect to the combination of forecast accuracy and recommendation profitability. Even with this finer segmentation of analysts there is no difference in their ability to make profitable recommendations in the future. Furthermore, regardless of forecasting ability, analysts are pre-disposed to recommend stocks with low book-to-market ratios and positive price momentum. This bias may impede their ability to make profitable recommendations.