Hedge funds have long held a jaded view of sell-side stock analysts, portraying their analyses as plain Jane and not alpha-generating. But is that a justifiable view? According to a recent academic study, they may be onto something.

Professors at Texas A&M and Ohio State universities have concluded that in cases where analysts and short sellers strongly disagree, an investor would be better off by going with the shorts. "In other words, buy if short interest is low and the analyst consensus is to sell; sell short if short interest is high and the analyst consensus is to buy," reports Reuters.

"Essentially, the short sellers are doing a tremendous job of using information with predictive value, and they really look like value investors," Edward Swanson of the Mays Business School at Texas A&M told Reuters.

Widely quoted short-seller Bill Fleckenstein piled on: "For the most part Wall Street analysts are just cheerleaders, so they kind of go with the flow and if the stock is trending higher they raise their price targets and say good things. That is not to say that analysts are always wrong and the short sellers are always right. But at the margin if it gets pretty lopsided, I would go with the short sellers."

Of course, the sell-side analysts who are used to being pilloried exist not to just turn a trading profit. They are analysts in a broad sense, providing services beyond just stock ratings. They are by definition short-term focused. So, in some ways, these results should be expected, as the shorts are more focused on rooting out core issues and less focused on daily coverage. My sense is they are both valuable when evaluated against their respective aims.

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