We all know the risks of running with the wrong crowd. This simple logic applies easily to investing — our behavioral valuation research has shown time and time again that running with the wrong crowd in the stock market often results in losses and underperformance.
Click to Enlarge Oddly, the Wall Street analyst community is often considered the “authority” for picking the right stocks. For decades, this group’s view on a stock was considered the gold standard for investment advice.
Ironically, a look at how stocks actually perform when the analyst community collectively loves or hates a stock tells a different story.
Our studies of the historical analyst recommendation data show that stocks with a majority of “buy” recommendations have a strong tendency to underperform the S&P 500 while those stocks that are heavily recommended as a “sell” tend to outperform the market.
The table below displays twenty of Wall Street’s “most hated” performers. The average percent of “buy” recommendations for each of these stocks is only 33%, despite their average year-to-date performance of 24%. These stocks will move higher as the analyst community starts issuing upgrades as they realize they’re on the wrong side of the market for these stocks.
Follow our incredibly simple rule — by buying analysts’ least recommended stocks — and you’ll be ahead of Wall Street soon enough.
Stocks the Analysts Are Missing the Boat On: Intuit (INTU)
Information technology company Intuit (INTU) provides financial solutions for small businesses and personal applications. Fundamentally, Intuit has spent the last two years shifting efforts to higher margin products, resulting in revenue and EPS growth that outpaces peers.
Wall Street’s current “buy” recommendations tally up to 41% of the analysts covering the shares, with 53% sitting in the “hold” camp. INTU’s continued technical dominance has sparked a number of analyst reiterations over the past three months, but we believe that the continued new highs and fundamental strength will force those analysts sitting on the fence to upgrade their opinions, driving prices even higher.
Stocks the Analysts Are Missing the Boat On: Darden (DRI)
Darden Restaurants (DRI) is turning into one of the better turnaround stories of 2015.
And yet, the analysts are still parked on the sidelines.
Year-to-date, DRI shares are up more than 25% as revenue and profits in the casual dining sector surge. As of now, only 45% of the analysts with an opinion have it ranked a “buy,” meaning that 55% of the crowd is being left behind.
Darden beat earnings expectations in June and issued a positive outlook too, adding more pressure to those with a “hold” or “sell.” We expect analysts to start piling on the bandwagon through the summer, pumping DRI stock higher.
Stocks the Analysts Are Missing the Boat On: O’Reilly Automotive (ORLY)
Auto parts companies like O’Reilly Automotive (ORLY) and AutoZone (AZO) continue to lead the retail sector thanks to do-it-yourselfers and professional mechanics sourcing their parts from these companies.
Year-to-date, ORLY shares are up 25%, but you wouldn’t know it from the analyst crowd, less than half of which is bullish on the stock. O’Reilly has been parabolic lately as it surges to new highs, but we’re convinced that any weakness will be bought into — and that analysts in the “hold” camp will view ORLY as more fairly valued.
Watch for upgrades and supreme technical strength to take ORLY toward $280 (17% higher) by year’s end.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.