Why you should buy the shares the analysts hate

Do City analysts really know where prices are going? Not judging by the results an investor could achieve by buying the stocks they all hate.

The City's analysts would have us believe they know more than the rest of us about where share prices are going, says Dominic Picarda in Investors Chronicle. But often they don't.

In fact, if in 2004 you had bought the analysts' ten least-favourite stocks (the ten stocks in the FTSE 350 covered by more than ten analysts and disliked by over 75% of them) at the beginning of the year, and held them for a year, you would have made 16.7% in 2004 (against a rise of only 9.7% for the index). If you'd done the same in 2005, you would have made 20% (an outperformance of 4.6%).

This doesn't mean investors shouldn't proceed with caution, however. In 2005, for example, the outperformance was down to just five shares: JD Wetherspoon, Easyjet, Lonmin, AstraZeneca and Cable & Wireless. So unlike the Dogs of the Dow' strategy, it looks as if you might have to stock pick within the Dogs, rather than buy the whole lot.

Following the same strategy this year would involve buying shares in Hanson (HNS, 694p), JJB (JJB, 176p), Matalan (MTN, 184p), Northern Foods (NFDA, 139p), Provident Financial (PFG, 599p), Trinity Mirror (TNI, 590p), JD Wetherspoon (JDW, 361p), Scottish & Newcastle (SCTN, 514p), Bovis (BVS, 811p) and Invensys (ISYS, 21p).

But Investors Chronicle has created its own portfolio of stocks the analysts hate and suggests the following ten: Matalan, Northern Foods and Scottish & Newcastle from the above list, plus Royal Sun Alliance (RSA, 126p), Woolworths (WLW, 34p), Alliance & Leicester (AL, £11.21), Electrocomp (ECM, 290p), Gallaher (GLH, 903p), Easyjet (EZJ, 396p) and Stanley (SLY, 842p).

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