MacBank, Babcock hog the podium

A wide-ranging survey of Australia's most recommended stocks “in aggregate” among 23 local stockbrokers has the battle-weary Macquarie Bank at the top of the list. Australia's biggest listed investment bank was chosen as a “Strong Buy” at 11 of 23 stockbrokers polled – the single biggest recommendation score in the report compiled by stock researchers at The Inside Trader.

Macquarie Bank and its offshoot Macquarie Communications Infrastructure Group (which came third in the survey) have suffered on the market over the past few months as shareholders fled investment banks and infrastructure-related investments.

Babcock & Brown, the market's second-biggest listed investment bank, emerges as the second most recommended stock, also getting a “Strong Buy” recommendation from nine of the 23 analysts.

The upper ranks of the list include a mixed range of mid-cap stocks including Sunland, the heavily sold-off property company run by the Abedian family (who own the Palazzo Versace hotel on the Gold Coast), retirement village owner/operator Aevum, and coal seam gas explorer Sunshine Gas.

nAnalysts' Strong Buys
Code	Company	Analysts in sample	Expected Growth Earnings Yr.1	Expected Growth Earnings Yr.2
MQG	Macquarie Group	11	-3%	11%
BNB	Babcock & Brown	9	11%	12%
MCG	Macquarie Communications Infrastructure Group	9	30%	8%
SMY	Sally Malay Mining	7	63%	-6%
RKN	Reckon	5	11%	10%
VIR	Viridis Clean Energy Group	5	-50%	-50%
ABY	Aditya Birla Minerals	5	47%	-11%
EQN	Equinox Minerals	5	567%	223%
NFK	Norfolk Group	5	20%	11%
NOD	Nomad Building Solutions	5	25%	12%
CIL	Centrebet International	4	20%	17%
DEX	Dexion	4	9%	8%
SDG	Sunland Group	4	21%	47%
TWO	Talent2 International	4	36%	20%
AJL	AJ Lucas Group	3	23%	8%
AVE	Aevum	3	8%	11%
MSL	The Mac Services Group	3	50%	28%
RRA	RR Australia	3	13%	11%
SHG	Sunshine Gas	3	0%	100%
AVX	Avexa	2	-13%	-29%
HSK	Heemskirk Consolidated	2	117%	0%
HZN	Horizon Oil	2	700%	-25%
OAK	Oaks Hotels and Resorts	2	30%	15%
PFG	Prime Financial Group	2	20%	17%
PLI	Peplin, Inc	2	-37%	42%
SOL	Washington H Soul Pattinson	2	13%	8%
VMG	VDM Group	2	24%	10%
WTP	Watpac	2	24%	12%

Source: The Inside Trader

Keith Nielsen, chief executive of The Insider Trader, says: “This is just a simple list of all 'Strong Buy’ recommendations from our poll of analysts,” Nielsen says.

Beyond looking at the 'Buy’ recommendations, Nielsen is also interested in the extent and impact of broker coverage. While a recent paper published in Finsia's Journal of Applied Finance, JASSA, argues that analyst coverage, even among large-cap stocks, is incomplete, and has in fact declined considerably since a peak in 2001, Neilsen says the fact that a stock is covered can give some indication as to its credibility.

“The amount of broker coverage is a good clue if it’s a good solid stock. But to find out the top stocks, we need to multiply the amount of brokers looking by the particular ratings those brokers give.”

Neilsen doesn’t give a particular weighting for any one broker over another within his sample of 23. “It goes against our catchcry that individual brokers can be wrong. We couldn’t just rate JB Were, for instance, as being better than others; it’s just not a scientific approach,” he says.

Neilsen’s stock list is thus not a recommendation but an aggregation. This flies in the face of the approach of other investors, such as the many hedge funds that look for inefficiencies in under-researched stocks, but Neilsen says there is wisdom in crowds.

“With the most recommended stocks – if you subscribe to the theory that if a lot of brokers are looking at it and saying it’s probably a good thing, then it probably is – we have created a portfolio of 10 stocks and have monitored them over time, changing the stocks on a monthly basis, depending on whether they came in or out of the top 10 stocks. In rough numbers, over a four-year period, these top 10 stocks outperformed the market by about 80%, and generally where they didn’t was when one stock went badly. It could have been an MFS, for instance.”

There is obviously no silver bullet for investing, and Neilsen says that recommendation aggregation is only one methodology among others that an investor may use, and the best methodology is dependent on the investor’s strategy and risk profile.

“It’s a good tool to help with picking a blue-chip portfolio, but director trades tend to be more accurate with smaller to medium type stocks. Analysing broker recommendations are good for blue-chips, but directors tend to have more of a feel for the pulse of a small to mid-cap company.”

Whether you choose to consult an analyst, an insider or a sack of runes for your share portfolio is up to you, but certainly there’s no harm in comparing the different methodologies. They may complement well those whispering voices in your head.