Does Portfolio Momentum Beat Analyst Advice?

Abstract

We conduct a comparison of three portfolio investment strategies in the US stock market following the implementation of Regulation Fair Disclosure in October 2000. The strategies analyzed are analyst‐recommended, recommendation changes, and momentum portfolios. Across various time periods, company sizes, and industry sectors, the momentum portfolio consistently outperforms the other strategies. Portfolios based on analyst recommendations exhibit poor performance in industries such as consumer staples and materials, which are strongly correlated with oil prices. These industries are susceptible to external demand and supply‐side price shocks that are not adequately captured by analyst recommendations. The findings highlight firstly, the efficacy of the momentum strategy and the limitations of relying solely on analysts’ recommendations, particularly in oil‐dependent sectors; and secondly, the varying dynamics and performance of different investment strategies for investors seeking to optimize their investment decisions across different sectors and market conditions.