Blogosphere may outperform professional analysts in stock picks

Seeking Alpha blog predicts stock rise/fall and earnings surprises more accurately

The ‘wisdom of the crowd’ may outperform high-paid stock market analysts when it comes to predicting the rise or fall of individual stock prices, according to a new study.

An analysis of about 100,000 articles and comments posted on the popular Seeking Alpha stock market blog shows that the tone of blog articles and comments are a better indication of coming price changes ‒ and even earnings surprises ‒ than financial news articles and analysis.

‘The opinions revealed on this site strongly predict future stock returns and earnings surprises,’ write the study authors ‒ who hail from the City University of Hong Kong, Cornell University, Purdue University and the Georgia Institute of Technology ‒ in their conclusions. ‘The predictability holds even after controlling for the effect of traditional advice sources, such as financial analysts and newspaper articles. Together, our findings point to the usefulness of peer-based advice in financial markets.’

The researchers compared SeekingAlpha.com posts and commentary with financial news articles from the Dow Jones News Service, including reports on analyst recommendations, upgrades and commentary, by searching for negative or positive words in each body of text related to a certain stock and then following the stock price for the next three months.

‘The predictability arising from [Seeking Alpha] comments is particularly evident when the number of comments over which the fraction of negative words is computed is relatively high,’ the researchers write. ‘Our results are robust to the inclusion of control variables reflecting analyst recommendation upgrades/downgrades, positive/negative earnings surprises and the average fraction of negative words in Dow Jones News Service articles.’

In an interview with the Wall Street Journal about the research, Yu Jeffrey Hu, one of the authors and an associate professor at Georgia Tech’s Scheller College of Business, says Seeking Alpha ‘is the only platform to date that we have shown can predict individual stock returns.’

He adds that the site’s mechanisms for bolstering the reputation of writers who prove more accurate or thoughtful, such as more promotions and bigger followings, also likely help boost the overall reliability of the site’s tone.

‘I wouldn’t say [Seeking Alpha blog writers] are absolutely better than the high-paid Wall Street analysts,’ Hu tells the newspaper. ‘But Seeking Alpha sentiment has additional insight above and beyond Wall Street financial analysts’.

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