Stock recommendations of most brokerage firms underperform the S&P 500 over 10 years according to new research by a U.S. finance professor.

The study, which has been accepted for publication by the Journal of Investing, found that the average returns of stocks recommended by major U.S. brokerage firms over the past decade fall short of the S&P 500 while showing greater volatility than the overall market.

“You cannot open a financial publication, visit an investing Web site, or tune into a televised business report without encountering an analyst’s recommendations about which stocks to buy,” said the study’s author, Dr. J. Randall Woolridge of Penn State University’s Smeal College of Business. “But the results of this study indicate that an investor following the stock recommendations of brokerage firms, on average, do no better than the overall market.”

The study, which analyzed data from quarterly surveys prepared by Zacks Investment Research and published in The Wall Street Journal, found that the average compounded quarterly return for recommended stocks was 2.17%, with the S&P 500 performing marginally better at 2.26%. The study also found that the variability of recommended stock returns is greater than the S&P 500.

On a risk-adjusted basis, the stock recommendations of only three of 10 brokerage firms with a full decade’s worth of data outperformed the S&P 500 (Merrill Lynch, Credit Suisse First Boston and Bear Stearns).

Merrill Lynch was the study’s clear-cut winner in terms of performance of recommended stocks for top-tier brokerage firms during the 10-year period. Merrill’s recommended stocks provided the highest compounded quarterly return (3.07%) and the lowest risk (beta = 0.92). A $1,000 investment in Merrill’s stock recommendations grew to $3,345.92 over the decade. A similar investment in the S&P 500 grew to $2,443.46.

In the category of average quarterly returns, measured against the S&P 500‚s 2.26%, the top-tier brokerage firms in the study performed at the following rates: Merrill Lynch (3.07%), CSFB (2.41%), Goldman Sachs (1.93%), Morgan Stanley (1.86%), Saloman Smith Barney (1.11%), and Lehman Brothers (1.00%).

http://www.smeal.psu.edu/news/releases/may03/stocks.html