Are Cover Stories Effective Contrarian Indicators?

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.For this study, we identified feature stories from the cover headlines inBusiness Week, Fortune, andForbes for a 20-year period (1983–2002) to determine whether positive cover stories are associated with superior future performance and whether negative cover stories are associated with inferior future performance (where “superior” and “inferior” were defined in comparison with an index or with another company in the same industry and of the same size). The feature stories were categorized according to a five-point scale (1 = very positive, 2 = optimistic, 3 = neutral, 4 = pessimistic past but a better future predicted, and 5 = pessimistic with the potential for management turnover and/or litigation).Our statistical testing implies, as expected, that positive business magazine cover stories follow significantly positive performance and negative stories follow significantly negative performance. In both cases, however, the appearance of a company on a cover apparently signals the end of the extreme performance. We found for these companies going forward weak evidence that optimistic (Category 2) cover headlines are an indicator for momentum on a six-month horizon after publication. Negative cover headlines do not provide a good signal for momentum or contrarian strategies when performance is measured against an index or on a size/industry-adjusted basis, despite a popular belief that such cover headlines are a contrarian signal. Indeed, we found that companies that were the subject of negative cover headlines tended to have positive holding-period returns after publication of the magazine, but the positive returns were not abnormally positive when adjusted for an index or for size and industry. Consequently, if an investor is short the stock that is the subject of a negative cover story, the investor should consider covering the short position because the stock has hit “bottom.”