Reading through the list of “most negative” names on the ASX 200, for interest.

Brokers usually only put a stock on a “sell” when they are pretty convicted in their view. There are reasons for this, that I won’t get into here.

Note, not everyone uses a “buy, hold sell” framework, there are “sell/avoid/negative/underweight/underperform” and more, so the mean (4th column) below is just the average of recommendations translated into a 1-5 approach, with 1 (being worst, akin to strong sell) to 5 (being best, akin to strong buy) framework.

CBA is chief amongst them. Everyone (well, 75% anyway) think it a sell, as do we (i.e. the proportion of 1s or 2s out of the total count of 16 recommendations is ~74-75%, and the mean of those scores is 1.62).

This is mainly because everyone sees the Price-book premium, relative to peers, and, notes the stage of the cycle (e.g. rising BDD’s in a leveraged beast).

So, it is a relatively uncontroversial outcome, which is why when you see the bank sector preference line-ups quoted in the media, or from broker notes, they usually lead with any other name first. (e.g. ANZ, WBC, NAB, CBA etc).

Does it make you money, these sell side recommendations? I have seen factor models (that go long +ve calls, and short strong -ve calls) that vary quite a bit in their estimates.

Some models do seem to show that profoundly negative broker views really do add value, given the institutional constraints and alignments that can be involved, and that you’ll make money avoiding or shorting consensus sells.

And some don’t, suggesting that consensus negatives are where the real alpha is to be had, given “everyone hates it”, and thus whatever they hate is priced in.

Mostly, the correlations are fairly low. There isn’t much predictive power either way. But, if you are in the positive or negative use case camp, you might in turn wonder how can it be both, how can both points be valid/of-interest?

Well, that’s markets. There is no “one thing” that works, there is no “one thing that works even sorta-kinda-most of the time”, not at least without some volatility, anyway.

So, it is simply something to be aware of, when constructing portfolios, and trying to backsolve for what the market expects.

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