Analyzing the analysts: how does consensus moves with profitability

Abstract

The purpose of this report is to present a quantitative strategy analysis based on the combination of an analyst’s recommendation and a measure of a company’s profitability, the return on equity. It tests how this combination can generate abnormal stock returns. Furthermore, it is also seen how an opposite strategy would perform. Several measures were calculated to evaluate the performance of both strategies. A long-only strategy of reverse IBES and profitability outperform on a risk-adjusted basis the long-only IBES and profitability, with yearly excess returns of 10.49% and a Sharpe ratio of 0.34.