Abstract
In this study, we analyze the forecast accuracy and profitability of buy recommendations published in five major German financial magazines for private households based on fundamental analysis. The results show a high average forecast accuracy but with a very high standard deviation, which indicates poor forecast accuracy with regard to individual stocks. The recommendation profitability slightly exceeds the performance of the MSCI World index. Considering the involved risk, which is represented by a high standard deviation, the excess returns appear to be insufficient.
Highlights
Private households considering individual stocks for their personal financial investments are exposed to a plethora of possibilities
The standard deviation was 0.3287, which indicates that the forecast accuracy for individual stocks was rather poor
The financial magazines’ portfolios are a theoretical construct rather than a real phenomenon. In this restrictive way, the analysis is legitimate because these parameters are immanent to the financial magazine design: They give more buy recommendations than a usual reader can follow, they do not give concrete recommendations on the weighing of the stocks in the portfolio, they appear on a certain publishing date, and the defined time horizon for the forecasts is one year
Summary
Private households considering individual stocks for their personal financial investments are exposed to a plethora of possibilities. Most of these investors lack the time, analytical skills, or even financial literacy (Gallery et al 2011; Lusardi and Mitchell 2014) to select individual stocks professionally on their own. We analyze both the forecast accuracy and profitability of buy recommendations published in five major German financial magazines. Forecast accuracy is defined as the relative discrepancy between the published target price, interpreted as a stock price forecast, and the actual price at the end of the forecast horizon. Recommendation profitability is defined as the relative difference between the actual stock price at the date of recommendation and that at the end of the forecast horizon (Ertimur et al 2007)
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