In their heyday, the Wall Street analysts were as close as you could come to Rock-Star status in the financial world. Wielding their Buy, Hold and Sell recommendations, the analysts were closely watched and followed as investors expected they always know something that everyone else didn’t.
These days, blogs, message boards and news feeds have flooded investors with information, but we still watch the sell-side analysts (specifically their recommendations) closely.
For the most part, analysts’ recommendations, as a group, are hard to quantify with respect to being helpful in identifying where opportunities lie in the market. For instance, one might expect the worst-ranked stocks return less than the market’s (S&P 500) returns while the top-ranked stocks beat the market’s returns.
Alas, this is rarely the case for stocks. We often see some of the highest-ranked stocks turning in lackluster performance while some of the worst-rated stocks can often outpace their higher-ranked brethren.
Take last quarter’s returns for example. As of December 31, 2011, the highest-rated stock in the S&P 100 Index, in terms of analysts’ ratings, was Halliburton (NYSE: HAL). At the close of the year, 94% of the analysts covering the stock had it rated a buy. Despite the high ratings, the stock finished the quarter in the lowest 10% of returns out of the S&P 100, down 3.8%.
On the other side of the coin, Bank of America (NYSE: BAC) was the best-performing stock in the S&P 100 and it was in the lowest 20% as far as analyst ranks go at the beginning of the quarter (with only 44% of analysts ranking it a buy).
Now, this isn’t to say that the analysts always get it wrong. For instance, JP Morgan (NYSE:JPM) was one of the top-rated stocks and it was one of the top-performing companies, but it does tell investors that they need to temper analysts’ ratings with other measures to find the best opportunities for their investing dollars.
For years, we’ve used analyst ratings as a contrarian indicator of sorts, though the ratings data does not change as often as the put/call ratio or short interest. When you consider an upgrade to a stock almost always brings buyers to the table, it’s worth taking into account when we’re looking at a stock or option trade.
So how do you use this data as an indication of when it’s time to buy a stock? Keep it simple and find the stocks that are likely to see upgrades. It sounds simple because it is…
Looking at the analysts’ rankings today, the list of most-hated stocks (those stocks with the lowest rankings) in the S&P 100 yields some tradable opportunities for investors to take note of as we head into the second quarter.
But first, the current list of most-loved stocks. For the second quarter in a row, Halliburton is the top-rated OEX stock with 94% of its analysts rating it a buy. This is the perfect example of a contrarian signal as the technical and fundamental picture for HAL is a screaming bear. For this reason, HAL is one of the many “most-loved” stocks that we’re identifying as a sell or shorting opportunity. We expect that continued weakness in these names (six of the 10) will put pressure on the analysts offering buy ratings to downgrade their outlooks, adding to selling pressure.
The table below identifies the 10 highest analyst rated stocks in the S&P 100. Based on their current technical trends and fundamental picture, we’ve provided our unique buy/sell ratings on these most-loved stocks.
Conversely, the next table displays the S&P 100’s 10 least-loved stocks along with our buy/sell rating. Note that five of these companies are rated a buy, according to our approach of identifying underrated companies that are performing well from a technical and fundamental perspective.
These five stocks are likely to pressure the analysts that currently rate them a “sell” to upgrade their opinions, driving the “crowd” to buy the shares as they ride the analysts’ coattails. Of particular interest will be Bank of America as it tries to carry over its strength as the “number-one” performer in the S&P 100 to the second quarter, a move that will certainly get the analysts upgrading from holds to buys.
While taking the opposing side of the analyst’s recommendations and opinions is less likely to yield results that would beat throwing a dart at the Wall Street Journal’s quote pages to pick a stock, they almost always provide the smart contrarian with trading opportunities to beat the market’s returns. We’ll follow-up with other measures similar to this that provide opportunities for you to beat the “crowd” to well-informed investment opportunities.
As of this writing, Chris Johnson does not own any of the aforementioned securities.