According to a white paper recently published by UK based research analytics vendor, Invisage, the number of sell-side research recommendations on technology stocks has surged since the roll out of MiFID II and the market disruption caused by the COVID-19 pandemic.
Invisage Analysis of Technology Research Calls
Invisage recently evaluated 30,000+ sell-side research recommendations on US Technology stocks that were made from January 2016 to the present. During the assessment period, 171 sell-side firms produced research recommendations on 685 stocks. 58.04% of these recommendations were BUY ratings, followed by 33.54% which were HOLD, and 8.41% were SELL recommendations.
Since the implementation of MiFID II in January 2018, the total number of sell-side research recommendations on technology stocks has increased significantly. Using the total number of sell-side recommendations on tech stocks published in 2020 as a base, the percentage of tech stock recommendations in 2016 was 58.21%, which rose to 58.94% in 2017. However, post-MiFID II, the same universe registered a noticeable surge as the percentage of tech stock recommendations hit 89.51% in 2018 and 95.63% in 2019.
It is interesting to note that during the first 8 months of 2020, the percentage of all technology recommendations that were BUYS hit 63.81%, considerably higher than the average seen since 2016 of 58.04%.
Performance of Sell-Side Technology Calls
To understand the context and the drivers for how tech stocks have performed over the past
year, Invisage constructed 2 market cap weighted indices — the Big Tech index (the top 8 tech stalwarts) and The Rest (292 tech stocks other than the top 8). Big Tech consists of Apple Inc, Microsoft Corp, Alphabet Inc, Amazon.Com Inc, Facebook Inc, Netflix Inc, Nvidia Corp and Tesla Inc.
As you can see from the chart below, Big Tech tracked largely in line with the overall tech sector from October 1 through the end of March 2020. However, thereafter a sharp divergence is evident between Big Tech stocks and the rest of the tech universe. From the period October 2019 through August 2020, Big Tech stocks posted a whopping 94.2% return while the remaining 292 technology stocks produced a gain of 33.3%.
To evaluate the performance of sell-side technology research, Invisage created two Research Consensus Portfolios corresponding to the Big Tech and The Rest market cap weighted portfolios. Research Consensus portfolios are constructed by aggregating all the open recommendations and then weighting the stocks based on the average of research ratings as derived by the Invisage platform for each open recommendation.
In the one year period ending August 31, 2020, the Research Consensus Portfolio for Big Tech (the 8 tech stalwart stocks) produced a 78% return – 16% less than the stock price change for the Big Tech index by itself. The Research Consensus for the Rest of Tech produced a gain of 42.3% — 9% higher than the 33.3% gain seen from the Rest of Tech portfolio.
Our Take
It is not terribly surprising that the number of recommendations on technology stocks has surged in the last few years as sell-side firms have tried to remain relevant to their buy-side counterparties in a post MiFID II world. It is also not surprising that the proportion of BUY ratings to overall recommendations has also risen as the tech market has posted strong gains.
The one finding from this paper that is most interesting is that sell-side research has underperformed the market significantly with the largest tech stocks, whereas sell-side research has slightly outperformed the market when looking at the rest of the tech sector.
For more information about the analysis included in this white paper, or how Invisage can help firms measure the quality of various types of investment research inputs, contact sales@invisagealpha.com.