We’re taught from a young age that safety comes in numbers. Whether it’s traveling to a strange place, eating lunch in the cafeteria or playing on the playground as a young student, we were instinctively taught to not be the lone wolf, it’s safer with the pack.
For many, this serves as their approach to selecting stocks to buy. Just stick with the crowd and everything will be good.
We’ve studied the Wall Street analyst recommendations on more than 4,000 stocks over the last 10 years and have found a trend that any investors can use to help their portfolio outperform the S&P 500: Pick the “lone wolf” companies when looking for stocks to buy!
Beating the S&P 500 can be as simple as staying away from the crowd. The theory is easy: Stocks that are overly-recommended by the analyst community are almost always over-owned by the investing public, because we’re taught to like stocks that the “crowd” likes.
At its simplest level, stocks go higher because there are more buyers than sellers. Following that, the crowded stock has already been bought by the crowd, meaning there are fewer prospective buyers to drive prices higher.
Last year, our list of Lone Wolf stocks to buy included companies like Dr Pepper Snapple Group Inc. (NYSE:DPS), Southern Co (NYSE:SO) and Quest Diagnostics Inc (NYSE:DGX), which racked up 47%, 26% and 36%, respectively.
With the start of 2015 underway, we’ve got three more stocks on our list of “lone wolf” stocks to buy for 2015.
“Lone Wolf” Stocks to Buy: Macerich Co (MAC)
Macerich Co (NYSE:MAC), a financial REIT, should continue to benefit from steady fundamentals, strong technicals and a lack of attention from the crowd. MAC shares are 60% higher over the last 12 months as the earnings picture remains strong. The low-interest-rate environment also helps MAC shares as it yields 3%. (Thanks, Janet Yellen!)
Only one of 20 analysts covering MAC stock have it ranked as a “buy.” We expect the other 19 to realize the bullish picture and start upgrading shares. We’ll get nervous when the “crowd” is in the buying camp; until then, expect MAC to lead the market higher.
“Lone Wolf” Stocks to Buy: Dr. Pepper Snapple Group (DPS)
A carryover from the 2014 list, Dr Pepper Snapple Group Inc. (NYSE:DPS) continues to represent a bullish opportunity for 2015. Twenty-two percent of the analysts covering the stock at this time last year had it ranked a “buy”; now that figure has dropped to 10%, despite the roughly 50% run. Dr Pepper has been beating revenue and EPS estimates for the last two years, driving prices higher.
DPS has been slowly retiring debt through restructures instead of initiating large stock buybacks, telling us that they are making fundamental improvements to drive better earnings results rather than the popular financial engineering that other companies have elected for.
We’ll expect to see the market buy any dips in DPS and the analyst crowd to drive things even higher as they start upgrading shares.
“Lone Wolf” Stocks to Buy: McDonald’s Corporation (MCD)
We’re not huge fans of the food, but McDonald’s Corporation (NYSE:MCD) isn’t going anywhere. The recent change in the boardroom suggests that changes are coming for this staple of fast food, it reminds of us another company that had lost its way years ago, Yahoo! Inc (NASDAQ:YHOO) and the success it found.
So, believe it or not, MCD shares are almost a mirror image of YHOO when Marissa Meyer took over. Currently, 19% of analyst covering MCD shares have it ranked a buy. Twenty-nine percent of the analysts ranked YHOO a buy when Marissa Mayer took over at YHOO in July 2012.
Both companies have a history of incubating companies to help generate revenue and earnings, but most importantly, they both serve as icons in their industry. We believe that the similarities will play out to McDonald’s advantage in 2015.
The C-suite announcement comes as MCD stock continues to consolidate above the $90 level for the past four years. The fact that shares have not technically broken down amid a huge sales slump tells you of the potential value retained in McDonald’s, with a new CEO providing the potential spark to move things higher. This, of course, will have those doubting analysts upgrading the stock at breakneck speed at the first sign that things are moving forward.
Looking back to our example, buy recommendations increased by 95% within 15 months of Mayer’s appointment as CEO while the stock went from $14 to $40 (an 85% return) — a perfect example of how being ahead of the crowd can pay off!
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.