Traditional thinking belies Wall Street analysts as inner circle elites who know where stocks are truly heading. Millions of dollars of tools, travel and data should be good for producing some killer picks that all of us should be following, right? Nope.
Click to Enlarge Looking at the empirical data, analyst recommendations tend to be less effective when the crowd of analysts appear to be unaware of a stock’s performance. In other words, stocks that are “underloved” by analysts, despite outperforming the market, tend to continue to rally faster than the market.
For this reason, our Behavioral Valuation models identify what we refer to as “Underloved Outperformers.”
The table to the right displays 29 companies that fall into the underloved category. Each of these stocks is trading more than 10%, despite the S&P 500’s current year-to-date loss of 4%. Just based off of their performance, you wouldn’t expect just 20% to 30% of analysts covering these stocks to rate them a “buy.”
What do they know that we don’t?
Nothing. They’re going to wind up playing catchup. These names are offering investors a chance to get into a few stocks before the Wall Street pros start upgrading them, driving prices even higher.
Put simply, these are your chances to beat Wall Street.
Underloved Stocks to Buy: Lockheed Martin (LMT)
The Fed’s failure to raise interest rates puts the spotlight back on strong dividend-yielding stocks like Lockheed Martin (LMT).
The company has been racking up new military contracts and is likely to continue doing so as the U.S. begins to address an aging military. The fundamentals have resulted in strong year-over-year revenue growth, as well as in strong earnings per share results. But despite the blockbuster performance, only 41% of the analysts tracking the stock have it ranked a “buy.”
This crowd will grow as we head into the year’s end, helping the price move toward our year-end price target of $220 while also paying a 3% dividend yield.
Underloved Stocks to Buy: Progressive Insurance (PGR)
Janet Yellen’s surprise hold on interest rates sets the stage for interest yielding allocations to gain some strength in the fourth quarter.
We love the setup for insurance companies in this environment, as they will benefit from a slow, steady climb in rates. But analysts have missed the boat on Progressive Insurance (PGR), as only 30% of the community has the shares ranked a “buy” despite the 17% year-to-date gains.
We’re expecting the real losers — the 26% that have been holding a “sell” recommendation on PGR — to start capitulating during the fourth quarter by issuing upgrades to this insurance leader. Watch for this to push shares toward a year-end target near $80.
Underloved Stocks to Buy: AutoZone (AZO) and O’Reilly Automotive (ORLY)
Despite the performance, they can’t get any respect from the analyst community as both are underloved with 35% and 45% buy recommendations, respectively. Compare that to Apple (AAPL), which boasts 73% buy recommendations as it is trading 4.5% higher YTD.
With revenue and EPS growing, the Street will start upgrading AZO and ORLY as year-end approaches, helping the shares catapult another 10% to 15% higher as a result of the window dressing that will follow.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.