Long-term growth forecasts and stock recommendation profitability

We investigate whether analysts' long-term growth (LTG) forecasts are a signal of analyst effort to better understand the future prospects of firms, which is reflected in the long-term profitability of their stock recommendations. We develop a one-year-ahead LTG forecast likelihood score and execute a trading strategy that generates average abnormal returns of 2.9% per annum over our sample period (1995-2005). Furthermore, in out-of-sample testing without portfolio rebalancing during the 2006-2011 period, our trading strategy earns abnormal returns of 2.5% per annum. In summary, this study illustrates previously undocumented long-term benefits accruing to investors from the information inherent in analyst LTG forecasts.