11 Bulls the Analysts Haven’t Caught Yet

by Chris Johnson | June 18, 2012 9:21 am

No one likes to be wrong about their opinion of a stock, especially when it’s their business to be right! On occasion, some of the best opportunities in stocks can be found when the analyst community is ignoring a company that is outperforming the market, especially since in general the analysts’ picks are supposed to do exactly that — outperform the market!

Given that, tracking the performance of a stock against the current analyst rankings is an easy way to uncover some diamond-in-the-rough investment opportunities before the analyst community jumps on them with upgrades.

The concept here is pretty easy. Stocks that are outperforming the market should have attracted a crowd of analysts to host buy recommendations on them. If the analyst community hasn’t raised the outlook or rankings on a stock that is leaving the market in the dust, then we can reasonably expect the stock is likely to start seeing upgrades soon, as the analysts hate to have sell ratings on a relative-strength-performing stock.

With that in mind, the table below identifies 11 stocks that have been beating the market by more than 10% on a relative-strength basis during the past three months and currently are underweighted in the buy recommendation category by the analyst community (less than 50% buy recommendations).

These stocks have been on a tear, posting positive results in a market that has been lackluster at best. For the most part, the list is an easy target for likely analyst upgrades as the stocks continue to outperform the market. The kicker, of course, is that any upgrades to these names likely will cause the stocks to surge even more than they already have. It’s easy to understand why this is an effective way to uncover stocks with better-than-average potential.

A few standouts:

We love discount and do-it-yourself related stocks given that consumers continue to look for ways to save. Wal-Mart (NYSE:WMT[1]), O’Reilly Automotive (NASDAQ:ORLY[2]) and Family Dollar (NYSE:FDO[3]) are firmly entrenched within this segment of the market. All three are trading with significant technical strength, though we like the straight retail plays of FDO and WMT over ORLY if pressed.

Another well-represented group is travel stocks, with Carnival Corp. (NYSE:CCL[4]) and Expedia (NASDAQ:EXPE[5]), though there are two different stories here.

CCL rankings were slashed after the sinking of the Costa Concordia[6] in January. Now, six months later, the stock is rebounding with improved outlooks and prices, but the analysts have yet to budge from their heavy hold and sell ratings. The stock is getting ready to move back above the pre-Concordia prices, which likely will get some analysts thinking about improving their outlooks with upgrades.

On the other hand, EXPE represents an opportunity to leverage the continued growth in the travel industry. With travelers returning to the road and air, EXPE is seeing some growth in revenue. After a disappointing first half of 2011, the company has been back on track in beating analyst earnings estimates on strong revenue growth. We expect this trend to continue, given the increase in travel, driving positive fundamentals and analyst upgrades.

In general, we’re expecting these stocks to continue their performance, forcing the hands of the analysts covering them to upgrade their ratings, potentially driving even more buying power into these names. It’s not often that you get an opportunity to get ahead of the analyst upgrade curve on names this big, so have fun getting in on these trends before the pros!

As of this writing, Chris Johnson did not hold a position in any of the aforementioned securities.

  1. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  2. ORLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORLY
  3. FDO: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDO
  4. CCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=CCL
  5. EXPE: http://studio-5.financialcontent.com/investplace/quote?Symbol=EXPE
  6. sinking of the Costa Concordia: http://investorplace.com/2012/01/carnival-gets-slammed-on-wall-street/

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