Investors don’t like being wrong. That’s doubly true when they’re getting paid to make their recommendations. This is what makes tracking the activity of Wall Street stock analysts so interesting and attractive as an indicator when hunting down stocks to buy.
Historically, our research shows any stocks that are more widely recommended as buy recommendations by Wall Street track even with the market. That makes sense, if you think about it. They’re often considered “crowded trades,” which means there’s less potential for new money to come rushing in to make their prices go higher.
So, how does this data get used as an indicator?
Our research also shows stocks that have outperformed the market and are underloved by Wall Street analysts (in other words, few buy recommendations despite performance that deserves respect) tend to outperform the S&P 500. These are the stocks to buy at any given time. But why does this happen? It’s mostly because analysts have to “catch up” to these stocks’ performance — so they don’t look like they’ve missed the ball, even though they have — by issuing upgrades. And those drive even more buying.
Using our database models, we’ve compared the performance of all 500 stocks in the S&P 500 Index with their current analyst rankings to identify a short list of stocks to buy because of their status as “underloved outperformers.” We believe each of these stocks will see upgrades in the near future, and thus have a high likelihood of being pushed even higher.