Spoiler alert: This is a quasi-public service post.
The reason is because there are times when financial journalists, maybe rushing to meet an approaching deadline or whatever, slap together some half-baked data analysis to support a sensationalist headline. These types of articles are the financial journalism equivalent of reckless driving, and have the potential to detonate some grievous financial injuries if taken seriously enough to propel action. Take for the example, the recent Barron’s Stock Screen article, “Amazon, Facebook, and 22 of the Most Undervalued Stocks, Right Now,” from February 16, 2021. The article’s author claims to found the most “undervalued” (in heavy quotes) companies using a stock screen, and yet provides no supporting data/evidence for a)why his claim should be believed or b)how the screen would have performed in the past. So, given this backdrop, what we will provide today is an outline of the Barron’s screen, and since the author didn’t provide any historical data, we’ll go about testing his screen for him, two different ways, and provide you with performance records so that you may draw your conclusions!!
The Barron’s Screen
The important point the author makes in the article are as follows:
- Stock analyst know their companies best.
- Stocks with heavy analyst coverage (10+) and with >50% buy ratings should be in the screen.
- Stocks with high analyst target price estimates relative to current represent value.
The screen basically requires us to take as a given that stock analysts know more than anyone else; that correctly forecast stocks that will outperform (especially those with a heavy coverage); and that they then give us the signal via buy ratings and/or price targets. In short, a very big bunch of “trust me and the stock analysts.”
So here are some counterpoints:
- I’d argue that even the mightiest stock analysts do not know companies as well as insiders (just ask those that covered Enron, etc.) and so statement 1. is easy to toss aside.
- Let us say number two is a valid and we assume analysts only issue buy ratings because of objective analysis (and not from banking or other conflicts that often creep up).
- Then we come to number three, here we are asked to assume that the analyst’s predictions are accurate and that the analysts will tell the general public before their best clients who in some case pay their firm millions of dollars in brokerage fees. And if you believe this is how things work, I will ask you now to also start believing in tooth fairies!
But let’s move on and get down to the screens and numbers. I tested the screen as presented in the Barron’s article, as best I could. I screened the Russell 3000 Index ex biotech looking for stocks with more than 10 analysts; greater than 50% buy ratings; and where the forecasted price was much greater than the current price. To get to a screen with roughly 20 holdings, like the article, I had to use a forecasted price increase of 28% above current price. I also made sure all companies had positive earnings, something not mentioned in the article, but which made sense. I named this screen the Analyst Price Target Screen. (The Barron’s articled mentioned weeding out commodity and biotech companies, but I kept the commodities in since because I am requiring positive earnings I will be avoiding the risky cyclical plays anyway.)
And I was not done. The Barron’s screen only considered analyst price forecasting abilities, and yet analysts spend a lot of time fixated on earnings. So, in S.75, I swap out price target for forward 12 month earning per share forecasts looking for stocks with the greatest forecasted earnings per share growth. I set this number at 400% earnings per share growth, which yielded a portfolio of just over 50 companies. This is the Analyst EPS Target Screen. Let’s see which does better and how they compare versus the Russell 3000 Index.
S.74– Analyst Price Target Screen
Stock Universe | Russell 3000 Index, Ex Biotech |
Rebalancing Frequency | AnnualIy |
Screen Criteria | 12 Month Trailing EPS>0 Analyst Coverage >10 Greater than 50% Buy Ratings Price Target>28% Above Current |
S.75– Analyst EPS Target Screen
Stock Universe | Russell 3000 Index, Ex Biotech |
Rebalancing Frequency | AnnualIy |
Screen Criteria | 12 Month Trailing EPS>0 Analyst Coverage >10 Greater than 50% Buy Ratings Forward 12M EPS Target>400% TTM EPS |
Results
Play around with stock screens long enough and you get a sense for what works and what doesn’t even before you run a backtest, and I had a big hunch that using analyst price and earnings forecasts would fail as screens, and they did (in terms of beating the Russell 3000 benchmark index). To top it off, using analyst forecasted stock prices fared much worse than using analyst earning per share estimates as an indicator of “value.” It was not close (5.8% per year return vs. 13.4%!). I hope someone shares this information with Barron’s so that they don’t get a ticket for “reckless financial journalism,” until then thanks for reading this public service announcement!
Test Results and Chart

