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Are Cover Stories Effective Contrarian Indicators?

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Abstract

Headlines from featured stories in Business Week, Fortune, and Forbes were collected for a 20-year period to determine whether positive stories are associated with superior future performance and negative stories are associated with inferior future performance for the featured company. "Superior" and "inferior" were determined in comparison with an index or another company in the same industry and of the same size. Statistical testing implied that positive stories generally indicate the end of superior performance and negative news generally indicates the end of poor performance.
70 www.cfapubs.org ©2007, CFA Institute
Financial Analysts Journal
Volume 63 Number 2
©2007, CFA Institute
Are Cover Stories Effective Contrarian Indicators?
Tom Arnold, CFA, John H. Earl, Jr., CFA, and David S. North
Headlines from featured stories in Business Week, Fortune, and Forbes were collected for a 20-year
period to determine whether positive stories are associated with superior future performance and
negative stories are associated with inferior future performance for the featured company. “Superior”
and “inferior” were determined in comparison with an index or another company in the same
industry and of the same size. Statistical testing implied that positive stories generally indicate the
end of superior performance and negative news generally indicates the end of poor performance.
he covers of business magazines have been
considered informative as a potential con-
trarian signal (e.g., Stalter 2005; Forsyth 1996,
1997; Queenan 1991). Aside from anecdotal
evidence and a few factual examples, however, such
a view has never been validated statistically. Others
have studied specific business analysts or television
programs (e.g., Desai and Jain 2004; Ferreira and
Smith 2003), tested the effect of company fortunes
statistically, and demonstrated a limited effect on
future short-term stock prices (many times only on
the first day after the information was reported). We
statistically tested the effect of business magazine
cover stories (as identified by the cover headlines)
on stock prices/returns for more than a 1,000-day
horizon (500 days prior to and 500 days after publi-
cation; we excluded the publication date from the
analysis). We investigated effects of cover stories
from Business Week, Fortune, and Forbes for a 20-year
period (1983–2002).
To formalize how a magazine cover article
might affect future returns, one can assume that the
given story reports new pertinent information or
simply reports past information. If the information
is genuinely new, the market can exhibit the follow-
ing reactions:
an instantaneous and correct reaction—that is,
a very short term effect occurs but no lingering
future effects;
an underreaction—a potentially longer-term
effect occurs that makes the story a momentum
indicator;
an overreaction—a potentially longer-term
effect occurs that makes the story a contrarian
indicator.
If the information contained in the article is not
new, the market can have the following reactions:
no reaction—that is, all information incorpo-
rated in prices;
a reaction that coincides with the popularity
of the stock—that is, a possible momentum
indicator;
a reaction that coincides with the stock being
mispriced—that is, a possible contrarian indi-
cator.
Most of the anecdotal evidence supports the
idea that cover stories are not informational
because of the time needed to gather information
for the article and to print it. The availability of
instantaneous business news and, to a lesser extent,
daily business news outlets put weekly and
biweekly (every two weeks) news magazines at a
great disadvantage in providing new information
about a company. Furthermore, the anecdotal evi-
dence tends to view the scenario in which the article
coincides with a stock being mispriced as giving
credence to the idea that the magazine cover story
is a contrarian indicator (again, assuming no new
information is revealed in the article).
We carried out tests to determine whether
cover stories are indicators of future performance
(momentum or contrarian). We did not consider
whether or not the given article revealed new infor-
mation about the company. Our bias, based on the
disadvantages of weekly and biweekly business
news magazines in reporting news in a timely man-
ner, was toward the hypothesis that cover stories
do not reveal new information about a company.
Cover Story Data and Analysis
We analyzed companies that were the subject of
feature (cover) stories in Business Week (weekly),
Fortune (biweekly), and Forbes (biweekly) maga-
zines between 1983 and 2002 for stock price perfor-
mance 24 months prior to and 24 months after (i.e.,
Tom Arnold, CFA, is assistant professor of finance at the
University of Richmond, Virginia. John H. Earl, Jr.,
CFA, and David S. North are associate professors of
finance at the University of Richmond, Virginia.
T
Are Cover Stories Effective Contrarian Indicators?
March/April 2007 www.cfapubs.org 71
500 business days on either side of) the date the
feature story was published. For purposes of the
analysis, the “publication date” was the date on the
cover minus 7 calendar days for Business Week and
minus 14 calendar days for Fortune and Forbes. In
other words, the publication date was considered
to be equivalent to the first day the magazine was
available to readers.
We categorized the cover headline of the fea-
ture story according to a five-point scale (1 = very
positive, 2 = positive/optimistic, 3 = neutral, 4 =
negative, and 5 = very negative). Although the
determination of whether a story was positive or
negative appears to be quite subjective, the cover
headlines of the stories clearly followed particu-
lar patterns:
Category 1: Company A “is” or “has done”
something innovative or profitable (very posi-
tive cover).
Category 2: Company A “plans to do” or “is in
the process of doing” something innovative for
the future, but will it work? (optimistic cover).
Category 3: The cover gives no particular opin-
ion as to whether Company A is good or bad
(companies are identified on the cover, but the
cover gives no indication of a positive or neg-
ative slant to the feature).
Category 4: Company A has experienced
“poor performance,” but the end of the poor
performance may be near (pessimistic past but
a turnaround is predicted).
Category 5: Company A is doing very poorly,
or a scandal has occurred (pessimistic cover,
sometimes implying a future management
change and/or litigation).
In addition to the clear tone of the cover head-
lines, the large sample should smooth individual
misinterpretations that may have occurred in cate-
gorizing the feature stories.
There were 593 feature stories during the 20-
year time period, for which 4 years of stock returns
for 549 subject companies were available for test-
ing.1 Table 1 displays the frequency of positive
(Categories 1 or 2), neutral (Category 3), and nega-
tive (Categories 4 or 5) feature stories in the period,
in total and by periodical. Note that, in general,
magazine feature stories do not focus on specific
corporations. This aspect is demonstrated by the
fact that out of a potential of 2,080 cover stories, only
593 focused on a particular corporation. Also, fea-
ture stories tend to be positive; 350 of the 549 sample
feature headlines (63.7 percent) were definitely pos-
itive, and only 100 of the 549 sample feature stories
(18.2 percent) were definitely negative.
Table 2 provides characteristics of the compa-
nies featured in the cover stories. The companies
tended to be large, without much variability in size
between the three periodicals. This characteristic is
not surprising because the magazines tend to have
similar readerships.
Table 1. Feature Story Frequency, 1983–2002
Positive Categories
Neutral
Category Negative Categories
Periodical 12Total 3 45Total
Business Week 62 97 159 57 38 36 74
(273 features) (21%) (33%) (54%) (20%) (13%) (12%) (26%)
Fortune 76 44 120 24 3 9 12
(146 features) (49%) (28%) (77%) (15%) (2%) (6%) (8%)
Forbes 47 24 71 18 7 7 14
(90 features) (46%) (23%) (69%) (17%) (7%) (7%) (14%)
Total 185 165 350 99 48 52 100
(549 features) (34%) (30%) (64%) (18%) (9%) (9%) (18%)
Table 2. Size of Companies Featured on Covers, 1983–2002
(market capitalization in $ millions)
Company Characteristic Business Week Fortune Forbes Total
Market-cap mean 43,653.6 52,371.4 38,112.6 45,091.1
Market-cap median 14,365.2 19,781.2 16,771.3 15,112.3
Adjusted market-cap meana49,532.3 61,312.5 41,651.5 51,401.5
Adjusted market-cap mediana19,884.4 23,402.2 16,711.1 19,332.0
aAdjusted to 2002 U.S. dollars using the U.S. Consumer Price Index.
Financial Analysts Journal
72 www.cfapubs.org ©2007, CFA Institute
To analyze the effect of a given feature story on
a company, we calculated prior-period holding-
period returns for 1 month (–21 to –1 trading days),
6 months (–125 to –1 trading days), 12 months (–250
to –1 trading days), and 24 months (–500 to –1
trading days) prior to the publication of the story.
We calculated similar postpublication holding
periods, with an additional holding period of 1 day
to 5 days (to examine short-term effects). We
excluded the day on which the feature story was
published from the holding-period returns to allow
for testing of cover stories as contrarian or momen-
tum indicators. Specifically, our goal was to mea-
sure something more “predictive” of the future, in
the sense of allowing a specific trading strategy to
succeed, than a “quick” adjustment by the market.
Table 3 displays the average holding-period
return (HPR) for all companies within a category for
various time horizons before and after publication
dates. The “adjusted return” (AR) is the average of
the holding-period return minus the equivalent
holding-period return for the value-weighted CRSP
Table 3. Holding-Period Returns for Three Groups, Data for 1983–2002
(measured in percentages)
Period from Publication (in trading days)
Category/Measure –500 to –1 –250 to –1 –125 to –1 –21 to –1 1 to 5 1 to 21 1 to 125 1 to 250 1 to 500
Positive categories—1 or 2 (n = 338)a
HPR 111.07 43.68 19.19 2.34 1.25 1.16 9.01 18.23 37.63
t-Statistic 7.47*** 9.97*** 8.10*** 2.97*** 3.35*** 1.63 4.70*** 5.85*** 5.90***
Signed rank-sum test 13.26*** 11.05*** 8.24*** 2.35** 3.33*** 1.60 4.66*** 5.60*** 6.79***
AR 79.58 28.17 11.94 1.13 0.72 –0.11 2.97 5.93 12.92
t-Statistic 5.42*** 6.75*** 5.59*** 1.59 2.27** 0.18 1.69* 2.07** 2.13**
Signed rank-sum test 8.66*** 7.00*** 4.88*** 0.49 1.77* 0.47 0.85 0.47 0.24
AHPAR–ISM 24.97 11.11 5.00 0.87 0.39 –0.36 5.13 3.85 11.48
t-Statistic 1.45 2.14** 1.81* 0.97 0.82 0.42 2.51** 1.18 1.65*
Signed rank-sum test 2.75*** 2.49** 2.16** 0.34 1.26 1.04 1.78* 1.02 1.05
Neutral Category 3 (n = 98)b
HPR 131.00 56.60 20.13 3.77 0.06 3.94 13.31 26.83 43.37
t-Statistic 2.81*** 3.40*** 3.67*** 2.38** 0.10 1.69* 3.68*** 3.58*** 4.99***
Signed rank-sum test 6.73*** 5.43*** 3.81*** 2.05** 0.36 1.42 3.87*** 3.64*** 4.98***
AR 96.90 40.83 13.22 2.01 –0.36 1.85 5.34 14.47 17.87
t-Statistic 2.09** 2.48** 2.50** 1.49 0.66 0.84 1.59 2.04** 2.25**
Signed rank-sum test 2.06** 2.29** 1.66* 1.29 1.11 0.33 1.55 1.01 1.03
AHPAR–ISM 2.11 14.11 9.52 2.23 –0.33 1.24 4.66 8.88 12.61
t-Statistic 0.03 0.83 1.87* 1.46 0.64 0.59 1.04 1.57 1.42
Signed rank-sum test 2.30** 1.40 1.53 1.49 1.04 0.85 1.02 1.52 1.59
Negative categories—4 or 5 (n = 96)c
HPR 6.11 –2.12 –0.72 –0.31 1.53 0.87 2.98 13.18 31.75
t-Statistic 1.08 0.55 0.23 0.21 1.98** 0.69 1.23 3.18*** 4.42***
Signed rank-sum test 0.48 0.16 0.40 0.20 2.25** 0.42 1.18 2.83*** 4.27***
AR –23.15 –15.96 –8.67 –2.04 1.11 0.30 –0.50 3.58 8.23
t-Statistic 4.79*** 4.70*** 2.73*** 1.15 1.73* 0.29 0.24 0.94 1.25
Signed rank-sum test 4.80*** 4.78*** 2.86*** 1.46 1.88* 0.08 0.53 0.04 0.24
AHPAR–ISM –71.22 –34.62 –13.54 –3.15 0.44 –0.17 0.08 3.22 7.91
t-Statistic 3.34*** 4.36*** 3.66*** 1.68* 0.57 –0.11 0.27 0.75 1.07
Signed rank-sum test 4.85*** 4.86*** 3.41*** 1.49 0.17 0.17 0.64 0.20 0.37
Notes: HPR = holding-period return, AR = adjusted return, and A HPAR-ISM = average holding-period abnorm al return. The t-statistics
are for differences from zero. Signed rank-sum statistics are for Wilcoxon signed rank-sum tests for differences from zero.
aTwelve cover headlines were redundant because the companies were in Category 1 or 2 within the prior three months.
bOne cover headline was redundant because the company was in Category 3 within the prior three months.
cFour cover headlines were redundant because the companies were in Category 1 or 2 within the prior three months.
*Significant at the 10 percent level.
**Significant at the 5 percent level.
***Significant at the 1 percent level.
Are Cover Stories Effective Contrarian Indicators?
March/April 2007 www.cfapubs.org 73
stock index. The “average holding-period abnormal
return—industry and size matched” (AHPAR-ISM)
is the average of the HPR of a given company minus
the equivalent HPR of another company that was
matched to it by size and industry (i.e., a non-cover-
story equivalent company).2 These two measures
provided adjustments to the initial HPR calculation
to determine whether a positive or negative abnor-
mal return was present.
For all return calculations, we attempted to
eliminate duplicate observations, defined as a fea-
ture story happening fewer than three months after
another feature for a given company and having
the same categorization. We included the first
instance and dropped the subsequent observa-
tion(s).3 Additionally, when a company was
delisted after publication of the issue in which it
was featured, we carried out the return calculation
through the delisting date and included it in all
calculations of holding-period returns.
Table 3 indicates that for companies with pos-
itive cover stories, positive holding-period returns
existed before and after the publication date that are
generally statistically significant (based on a t-test
and a Wilcoxon signed rank-sum test). When the
holding-period returns were adjusted for an index
or for size/industry, however, most positive abnor-
mal returns dissipated after the publication date.
This result is not always the case; the AR measure
displays some positive adjusted returns based on
t-tests (a mean-based test) but not always based on
the signed rank-sum test (a median-based test). The
AHPAR-ISM measure displays a statistically signif-
icant positive adjusted return based on agreement
by both statistical tests only for the six-month post-
publication horizon.
In Table 4, where Category 1 and Category 2
companies are separately examined, much of the
statistical significance vanishes except for the six-
month horizon AHPAR-ISM measure for Category
2. Consequently, for companies that are the subject
of optimistic cover stories, we found, at best, weak
evidence of a momentum indicator over the six-
month horizon.
For the companies with negative cover stories,
Table 3 reports statistically negative adjusted
holding-period returns for the two years (and peri-
ods of less than two years) prior to publication,
except for one month prior to publication. After
publication, the holding-period returns are no
longer negative and, on an adjusted basis, tend to
not be significantly different from zero. When Cat-
egories 4 and 5 are presented separately in Table 4,
almost all statistical significance on an adjusted
basis disappears. The holding-period return for the
one-month period prior to publication for Category
5 companies, however, is significantly negative on
an adjusted basis.
In summary, we found no signs that negative
stories are a momentum or contrarian indicator. If
a trader was shorting one of these stocks, however,
the trader should have considered covering the
short position after seeing a negative cover head-
line on the company because the stock hit its “bot-
tom” level at that time.
To test the robustness of these results, we per-
formed a calendar-time portfolio analysis. For each
category and subperiod, we formed an equally
weighted portfolio of companies; we rebalanced it
every month for the entire sample period, January
1983 through December 2002. Over time, some com-
panies dropped out of the portfolio as they were
delisted. The results were consistent with Table 4.4
Conclusion
As one might expect, positive feature stories head-
lined on business magazine covers follow extremely
positive company performance and negative head-
lines follow extremely negative performance. In
both cases, however, the appearance on a cover of
Business Week, Fortune, or Forbes tends to signal the
end of the extreme performance. Going forward
from publication dates, we found only weak evi-
dence that optimistic cover stories (Category 2) are
an indicator for momentum for a six-month horizon
after publication. Negative cover headlines appar-
ently do not provide a good signal for momentum
or contrarian strategies when performance is mea-
sured against an index or measured on a size/
industry-adjusted basis—despite a popular belief
that such stories are a contrarian signal. Indeed,
companies in the study that were the subjects of
negative feature stories tended to have positive
holding-period returns after publication of the mag-
azine, but the positive return was not abnormally
positive when adjusted for an index or for size and
industry. Consequently, we conclude that if an
investor is short the stock of a company that is the
subject of a negative cover story, the publication of
the story indicates it is time to cover the short posi-
tion because the stock has hit bottom.
This article qualifies for 1 PD credit.
Financial Analysts Journal
74 www.cfapubs.org ©2007, CFA Institute
Table 4. Holding-Period Returns: Positive and Negative Categories, Data for 1983–2002
(measured in percentages)
Period from Publication (in trading days)
Category/Measure –500 to –1 –250 to –1 –125 to –1 –21 to –1 1 to 5 1 to 21 1 to 125 1 to 250 1 to 500
Positive Category 1 (n = 182)a
HPR 119.41 56.92 19.73 1.54 1.15 1.45 8.13 17.37 29.81
t-Statistic 5.70*** 7.41*** 5.77*** 1.78* 2.20** 1.69* 3.66** 3.86*** 5.16***
Signed rank-sum test 10.50*** 9.00*** 6.53*** 1.30 2.24** 1.70* 3.21*** 3.58*** 4.87***
AR 88.82 32.01 13.02 0.64 0.79 –0.03 1.82 4.63 5.07
t-Statistic 4.29*** 5.31*** 4.19*** 0.78 1.56 0.06 0.87 1.09 0.93
Signed rank-sum test 8.00*** 6.575*** 4.62*** 0.04 1.20 0.05 0.04 0.38 0.77
AHPAR-ISM 42.71 17.63 8.25 1.03 0.37 –0.43 2.87 2.75 4.18
t-Statistic 1.87* 2.40** 2.05** 0.93 0.50 0.51 1.26 0.62 0.59
Signed rank-sum test 3.91*** 3.36*** 2.92*** 0.51 0.38 0.91 0.19 0.06 0.34
Positive Category 2 (n = 162)b
HPR 105.61 39.92 18.65 3.23 1.22 0.51 9.57 19.59 45.76
t-Statistic 5.02*** 6.89*** 5.84*** 2.39** 2.55** 0.51 3.04*** 4.59*** 3.92***
Signed rank-sum test 8.23*** 6.71*** 5.27*** 2.08** 1.97** 0.21 3.24*** 4.32*** 4.79***
AR 73.37 23.78 10.93 1.68 0.51 –0.21 4.11 7.92 21.43
t-Statistic 3.54*** 4.32*** 3.81*** 1.35 1.48 0.27 1.44 2.11** 1.93*
Signed rank-sum test 4.28*** 3.42*** 2.45** 0.69 0.94 0.73 1.07 1.08 0.38
AHPAR-ISM 4.12 1.72 0.03 0.22 0.37 –0.16 7.46 5.15 18.54
t-Statistic 0.16 0.25 0.01 0.23 0.75 0.10 2.16** 1.11 1.53
Signed rank-sum test 0.05 0.10 0.16 0.17 1.45 0.51 2.30** 1.39 0.99
Negative Category 4 (n = 47)c
HPR 7.11 1.61 4.44 4.27 0.78 0.285 0.12 6.89 23.66
t-Statistic 0.88 0.36 1.06 1.75* 1.01 0.19 0.02 1.50 3.29***
Signed rank-sum test 0.11 0.27 0.23 1.37 0.92 0.27 0.11 1.39 2.76***
AR –21.13 –11.40 –3.17 2.14 0.81 –0.20 –2.58 0.20 4.01
t-Statistic 2.90*** 2.78*** 0.78 0.92 1.23 0.15 0.39 0.05 0.60
Signed rank-sum test 3.20*** 2.83*** 1.11 0.26 1.06 0.25 0.83 0.50 0.21
AHPAR-ISM –111.03 –46.10 –12.67 0.645 –0.58 –2.88 –2.18 0.72 5.91
t-Statistic 2.65*** 3.14*** 2.22** 0.25 0.70 1.89* 0.48 0.14 0.63
Signed rank-sum test 3.54*** 3.23*** 1.84* 0.20 1.01 1.40 0.15 0.02 0.50
Negative Category 5 (n = 52)
HPR 4.62 –6.33 –6.21 –4.73 1.81 1.14 5.27 18.78 39.63
t-Statistic 0.60 1.10 1.21 1.89* 1.56 0.65 1.57 2.92*** 3.39***
Signed rank-sum test 0.41 0.72 1.05 1.09 1.93* 0.12 1.51 2.65*** 3.34***
AR –25.22 –20.44 –14.57 –5.85 1.38 0.79 0.79 5.98 12.03
t-Statistic 4.09*** 4.03*** 3.17*** 2.44** 1.17 0.44 0.22 1.00 1.12
Signed rank-sum test 3.63*** 4.01*** 2.93*** 2.53** 1.37 0.13 0.32 0.24 0.24
AHPAR-ISM –34.63 –23.72 –15.41 –6.78 1.25 2.22 2.98 5.37 12.42
t-Statistic 3.77*** 3.76*** 3.31*** 2.76*** 1.12 1.25 0.79 0.81 1.11
Signed rank-sum test 3.50*** 3.71*** 3.17*** 2.53** 0.95 1.51 0.99 0.17 0.40
Notes: See notes to Table 3.
aThree cover headlines were redundant because the companies were in Category 1 within the prior three months.
bThree cover headlines were redundant because the companies were in Category 2 within the prior three months.
cOne cover headline was redundant because the company was in Category 1 within the prior three months.
*Significant at the 10 percent level.
**Significant at the 5 percent level.
***Significant at the 1 percent level.
Are Cover Stories Effective Contrarian Indicators?
March/April 2007 www.cfapubs.org 75
Notes
1. For hypothesis testing, we used the 24 months prior to the
feature story.
2. Size and industry match was based on market value of
equity and two-digit SIC classification and was set as of the
day of publication.
3. The results remained qualitatively similar whether these
observations were deleted or not.
4. These tabulations are available through a link from this
issue’s contents page at www.cfapubs.org.
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Abraham Briloff is well known for more than four decades of insightful analysis and criticism of the accounting practices of various companies. His critiques, in the form of articles published in Barron's, consist of detailed financial analyses of the questionable accounting practices of the companies he examines. Previous research has shown that the companies criticized by Briloff in Barron's experience significant negative abnormal returns around the article's publication date. To understand the valuation effect associated with his financial analyses, this article examines long-run abnormal returns following the publication date. In addition to the initial negative reaction on publication of the articles, the companies in the sample experienced further significant risk-adjusted returns for one and two years of, respectively, -15.51 percent and -22.88 percent. The results show that a decline in future operating performance appears to be an important reason for the poor stock market performance of the companies. Thus, Briloff could apparently foresee the coming decline in operating performance better than the market could. These results underscore the importance of understanding a company's accounting and of the role of careful financial statement analysis.
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The purpose of the study we report was to determine the information content of the recommendations made by panelists during 1997 on "Wall Street Week with Louis Rukeyser." Using event-study methodology for the short term, we found a statistically significant positive abnormal return of 0.65 percent for the recommendations on the first trading day after the show on Friday. To determine the abnormal long-term (one- and two-year) average holding-period returns, we used two matching processes. Using industry and size matching, we found not only that the portfolio of recommended stocks improved in value during the following eight quarters but that its increase in value was higher than for the matched sample in all eight quarters and statistically significantly higher in half of the eight quarters. Using industry, size, and book-to-market matching, we found similar results. Overall, this study's results suggest that the panelist recommendations have significant information content.
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Beware: Magazine Cover Stories about Fed Chairman Tend to Be Contrarian Indicators for Bonds
  • R Forsyth
Forsyth, R. 1996. "On Borrowed Time: Why Investors Should Worry about Magazine's Cover on Fidelity." Barron's National Business and Financial Weekly, vol. 76, no. 40 (30 September):18. ---. 1997. "Beware: Magazine Cover Stories about Fed Chairman Tend to Be Contrarian Indicators for Bonds." Barron's National Business and Financial Weekly, vol. 77, no. 28 (14 July):MW10.
Magazine Covers Often Signal the Top of a Great Stock's Rally
  • K Stalter
Stalter, K. 2005. "Magazine Covers Often Signal the Top of a Great Stock's Rally." Investor's Business Daily (22 June):B07.
On Borrowed Time: Why Investors Should Worry about Magazine’s Cover on Fidelity
  • R Forsyth