Wall Street’s analyst community is paid to stay ahead of the equity game and target stocks to buy and sell. But just like in every other profession, not everyone gets their job right every time.
In many cases, this group of influential investors miss opportunities, which is why investors should pay special attention to stocks that are outperforming the market with low analyst recommendations.
The theory is simple: Regardless of the amount of knowledge and data available to the analyst community, we still see signs that the herd mentality tends to drive upgrades and downgrades. As a result, we sometimes find stocks to buy that have somehow made it into Wall Street’s “sell” column.”
Given this, the longer an underrated stock outperforms the market, the more likely analysts are to begin upgrading … and given the herd mentality, one upgrade usually leads to a stampede as the rest of the Street realizes that it’s on the wrong side of the trade.
We’ve got a list of 14 stocks to buy for just that very reason.
Right now, we’ll take a closer look at two we like in particular, then show you the rest of this group of stocks you should have on your radar.
Stocks to Buy: Dr Pepper Snapple Group Inc. (DPS)
Click to Enlarge We highlighted Dr Pepper Snapple Group Inc. (DPS) for you six months ago when the shares were trading for under $58. At that time, DPS shares were trading 19% higher year-to-date against the S&P 500 YTD return of about 1%. Despite the strong performance, only 18% of the analysts covering the stock had it rated a “buy.”
Six months later, and DPS stock is trading at $72.50 for a nice 47% YTD return (25% higher than the last time we told you to buy it), markedly outperforming the S&P 500.
Of course, the analysts have caught on to the performance and upgraded the stock accordingly, right?
Wrong.
Today, only 9% of the 22 analysts covering the stock have ranked DPS stock a buy, while 73% have it in their “hold” category.
We’ve all heard the term “chasing alpha” when referring to the professionals buying stocks that should have been in their portfolios a long time ago. Well, DPS should soon be near the top of their “stocks to buy” lists as Dr Pepper continues to punch through to new highs.
The good news is that there is room to move higher still as the big money starts buying and upgrading into year’s end.
Stocks to Buy: Wellpoint Inc (WLP)
Click to Enlarge Another stock on the analyst’s “Stocks to Buy” lists is Wellpoint Inc (WLP). The company provides managed-care programs for small and large companies and has done a great job of lining itself up for improved success with the implementation of the Affordable Care Act.
By the chart alone, WLP stock is attractive to say the least. This relative strength leader has outperformed the market by more than threefold. That, combined with the fact that the company has beat analysts’ earnings estimates by an average of more than 10% over the past couple of years.
You wouldn’t know how well WLP stock has done given the paltry 36% of current analyst recommendations in the “buy” category. But history tells us that WLP will benefit from a surge of upgrades and buying as the analyst community plays catch up with this leader.
Other Recommendations
Some additional “underloved outperformers” are listed below, including Intel Corporation (INTC), which has caused a lot of buzz recently with improved forecasts and increased positive media coverage, putting it near the top of the “stocks to buy” list as it breaks to its highest levels in more than a decade.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
