We scan Wall Street analyst’s recommendations on a regular basis to look for investing and trading opportunities, but it’s probably not what you’re thinking.
Click to Enlarge Typically, investors look at analyst recommendations to make themselves comfortable about buying a stock. Remember, investors are like most animals, they like the safety of numbers or travelling in packs.
For instance, many investors look at a stock that is poorly ranked by Wall Street as something to avoid, but that’s not always the case.
Historically, taking a contrarian view of Wall Street stock recommendations can be very profitable, but there’s a catch. The catch is that this contrarian approach only works when the fundamental and technical analysis of a stock goes against the grain of Wall Street’s view.
For example, a stock that is technically and fundamentally strong but under-loved by the analyst community (represented by low buy recommendations) has a strong tendency to outperform the market, usually as a result of those under-appreciative analysts issuing upgrades!
The table below identifies 12 under-loved S&P 500 companies, despite the fact that each of them has significantly outperformed the S&P 500’s year-to-date return. Given their strong performance, one would expect that the analyst community should be bullish on these stocks. Not the case, though, as the majority of analysts covering these stocks remain on the sidelines. We expect to see upgrades help continue these stock’s strong technical trends.
The following are three of our favorite under-loved stocks from the list.
Under-Loved Stocks to Grab: Wal-Mart Stores, Inc. (WMT)
Performance Year-to-Date: +10%
6-month Price Target: $75
Wal-Mart Stores, Inc. (NYSE:WMT) is making moves again after fundamental changes that focus their business back on core strengths. Year-to-date, Walmart stock is trading a little over 10% higher, but what makes its performance even more attractive is the low volatility trend the stock has been able to maintain.
Low volatility plus a dividend of 2.9% will make Walmart stock even more attractive through the year as we expect to see the market remain range-bound and turbulent.
Wall Street analysts are behind the curve on Walmart’s attractiveness as only 14% of those rating the stock have it ranked as a buy. The long-term recovery trend will start pressuring analysts to upgrade the stock, adding buying power to it. Our models currently target $75 over the next six months.
Under-Loved Stocks to Grab: Campbell Soup Company (CPB)
Performance Year-to-Date: +20%
6-month Price Target: $70
Campbell Soup Company (NYSE:CPB) is acting as it should as investors are flocking to lower volatility defensive positions to weather the choppy market. Campbell’s Soup shares are trading nearly 20% higher than where they started the year as they forge to new highs.
But, you wouldn’t know how strong Campbell’s Soup has been since only 13% of Wall Street analysts have it in their books as a buy.
The company has met or exceeded analyst’s earnings targets all of the last eight quarters with improving results on their top line revenue growth. The positive fundamentals mix with an extremely strong technical pattern, and add up to a strong outlook that is likely to force analysts into upgrading Campbell’s Soup shares.
Looking forward, our models expect the strong trends and analyst upgrades to drive Campbell’s Soup stock towards a 6 month price target of $70.
Under-Loved Stocks to Grab: W W Grainger Inc (GWW)
Performance Year-to-Date: +13%
3- to 6-month Price Target: $250
W W Grainger Inc (NYSE:GWW) works hard in all markets and gets little appreciation. GWW stock is 13% higher for 2016 as it has experienced a technical turnaround after building a bottom under $200. We saw a similar long-term bottom in the share’s price in 2013, suggesting that the technical buyers are starting to grab the stock at a value.
The Analysts aren’t convinced yet though as only 18% tracking the stock have it ranked a buy. This isn’t too surprising to us as the stock is making a long-term bottom at $200, but it does signal to us that a rally from this point is going to get support from analyst upgrades.
GWW shares will cross back into long-term bullish territory with a move back above the $230 level. Historically, a move like this will start to attract the attention of Wall Street and garner upgrades. Given this, our current models suggest a 3-6 month price target of $250 for GWW stock.
