The market’s rally is catching many investors off guard, as stocks are surging through what is normally a seasonally weak patch of the year. But, among the countless stocks to buy, there’s a special group of stocks participating in the rally that are taking the smarter minds on Wall Street by surprise.
This situation will likely provide nimble investors with an opportunity to ride Wall Street’s coat tails.
The group I’m talking about is what I refer to as the “under-loved performers”. Stocks that are turning in strong performances that are among the least recommended by Wall Street analysts fall into this category.
The idea behind taking a position in these stocks is simple: At some point, the bearish analysts will become more bullish and begin upgrading these stocks as they continue to outperform the market. Those upgrades then add more fuel to the rally fire. Of course, by being there before the upgrades we get the benefit of their buying.
Our database models filter through the S&P 500 on a daily basis to identify the under-loved performers that are ripe for the next upgrade rally. The following are three of the best under-loved, high-performing stocks to buy.
Under-Loved Stocks to Buy Before Wall Street Wakes: Caterpillar Inc. (CAT)
Short Interest Ratio: 6.8
The analysts really don’t like Caterpillar Inc. (CAT). In fact, only 5% of the Wall Street crowd has CAT stock ranked as a buy.
To some degree you have to agree that there should be some bearishness towards the stock after turning in a 12-month return of -9.5%, while the S&P 500 is up just under 2% for the same period.
The analysts should be the trendsetters though, not the followers, which is why we think there’s an opportunity here. Caterpillar shares are starting to show signs of a longer-term turnaround as the fundamental data (earnings and margins) have helped the stock build a base at the $60 mark. This is also the site of some technical support as well.
The charts are showing a friendly trend for CAT stock, with the stock’s 50-day moving average shifting into bullish mode as the stock gets ready to break above the $80 price.
An added bonus is the short interest ratio, which is elevated to 6.8. This indicates that the potential for a short covering rally exists when the stock breaks $80. Right now, Caterpillar remains on our buy list with a price target in the mid-90s.
Under-Loved Stocks to Buy Before Wall Street Wakes: Paychex, Inc. (PAYX)
Short Interest Ratio: 10.4
Our models have been bullish on Paychex, Inc. (PAYX) for some time now, as everything from a growing jobs market to increased regulations help this payroll processor (plus more) to build even stronger fundamentals.
Along with a positive fundamental backdrop, the company has been a relative strength leader against the S&P 500 over the last year racking-up 14.6% gains against the S&P for the same period. Looking at a shorter-term period, Paychex stock has only slightly outperformed the market on a year-to-date basis, but has done so with 25% less volatility that the S&P 500 while paying a 3% dividend.
Sentiment is decidedly negative: The short interest ratio for PAYX stock is 10.4 and building, as it did in the third quarter of 2015 just before a rally that took the shares from $47 to $54.
Also decidedly lopsided on the sentiment front is the current 10% buy rankings from the analysts covering the stock. Remember, only 10% of the Wall Street analysts are recommending this stock a buy as it continues to punch through to new all-time highs for the last few years.
The analysts will start to feel the pain of not having PAYX on their “Buy Lists”, which will likely result in some upgrade opportunities for the shares to help those of us wise enough to see an opportunity watch the stock go higher.
Under-Loved Stocks to Buy Before Wall Street Wakes: Quest Diagnostics Inc (DGX)
Short Interest Ratio: 7.4
Healthcare-related stocks have been taking some heat as the regulatory and insurance environment appear to be approaching some tectonic shifts. We like the idea of Quest Diagnostics Inc (DGX) as a holding, since they perform lab work that everyone will still have to have done and they’re doing it with good margins.
Quest Diagnostics shares are another example of a stock that is getting ready to break through to new highs as the analyst community is missing the boat. Currently, only 14% of the analysts covering the shares have it ranked a buy.
The chart for DGX is incredibly attractive, as it shows a pending breakout to new all-time monthly highs as the shares approach $80. This is where we think a few things will happen.
First, a sustained move above $80 is likely to generate some upgrades, which will get the crowd buying shares of Quest Diagnostics. Second, the break above $80 will also likely trigger a short covering rally, as the current short interest ratio of 7.4 remains slightly elevated.
From a break above $80, our models target another 10% to 15% move in DGX shares before year-end.
As of this writing, Johnson Research Group did not hold a positon in any of the aforementioned securities.
