GE's shocker
Commentary: Why stock most popular with newsletters isn't a contrarian case
By Mark Hulbert, MarketWatch
Last update: 11:45 a.m. EDT April 13, 2008
ANNANDALE, Va. (MarketWatch) -- General Electric Co. shocked Wall Street on Friday, reporting first-quarter earnings that were well below what had previously been forecast.
Investors returned the favor by driving its stock down by 13% -- in dollars terms, erasing $47 billion of market capitalization.
But the shock extended beyond just Wall Street: Going into Friday's session, GE was far and away the most popular stock among investment newsletters.
Of the 189 newsletters on the Hulbert Financial Digest's monitored list, for example, no fewer than 21 were recommending GE for purchase. The next most popular, Johnson & Johnson was recommended by "just" 18 newsletters.
Those of you who share my contrarian bent may not find it surprising that a popular stock would suffer such an ignominious fate.
After all, as I never tire of pointing out when I'm writing one of my against-the-grain columns about the overall market's direction, the markets rarely accommodate the majority. It would certainly seem to make perfect sense, then, that a stock at the head of the newsletters' hit parade would be a disappointment.
Supporting this notion is the market-lagging performance of a stock that, earlier this decade, was at the top of the newsletters' list of most popular. That stock was Pfizer Inc. , which despite being so popular, underperformed the overall market by a large margin.
I nevertheless believe that this is a case in which contrarian analysis isn't particularly helpful. GE and Pfizer's respective experiences notwithstanding, those stocks that rank as most popular among newsletters, on average, actually outperform the market.
That at least is the conclusion reached by a recent Hulbert Financial Digest study. A comprehensive analysis of newsletters' most popular stocks, it focused on more than 2,000 stocks -- the stocks that, as of each month-end dating all the way back to mid-1980, were then most popular.
For each of these myriad stocks, the HFD study compared its total return to that of the Dow Jones Wilshire 5000 total-return index over both the month and the 12 months following the month-end date at which it made it into this database.
Marginally better performance
It turns out that, on average since mid-1980, newsletters' most popular stocks did 0.15% (15 basis points) better than the Dow Jones Wilshire 5000 over the month following the date on which they became most popular. On average over the subsequent 12 months, they did 0.57% better than the Dow Jones Wilshire 5000.
To be sure, these margins of outperformance are not overwhelming. The amounts by which newsletters' most popular stocks outperform the overall stock market are probably not large enough to pay the transaction costs associated with a short-term trading strategy in which stocks are bought and sold each month according to their popularity.
Even so, notice that the contrarians are wrong to believe that newsletter popularity is something that automatically should be avoided when it comes to picking individual stocks. To the extent we can generalize from the historical record, we must say that newsletter popularity is a good thing rather than something to be shunned.
Popularity contest
Further, it's still possible to take advantage of newsletters' most-liked stocks, even if it wouldn't be profitable to pursue a short-term trading strategy based on newsletter popularity.
For example, you may have already decided, for completely separate reasons, to either increase or decrease your exposure to the stock market. In that event, you'll be paying transaction costs anyway.
If so, then the pre-transaction-cost performance numbers are the appropriate ones on which you should focus when deciding whether some stocks are more or less deserving of being bought or sold. And, in that event, it may behoove you to give extra consideration to a stock that is very popular among newsletters.
With that thought in mind, here are the stocks that, as of a Sunday-evening deadline, are most popular among the nearly 200 newsletters tracked by the Hulbert Financial Digest. Notice that GE remains most popular, despite Friday's carnage:
Company Ticker # newsletters recommending
General Electric Co. GE 21
Johnson & Johnson JNJ 18
Apple Inc. AAPL 15
Pfizer Inc. PFE 14
Microsoft Corp. MSFT 14
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