One of the most effective rules that we developed over the last 20 years is that it is always best to avoid the crowd when you’re investing. What do we mean by that? Most investors are familiar with the contrarian idea of buying into the market when everyone else is selling and then selling when everyone has been buying.
This “rule” is familiar because it works!
The same strategy can be applied to investing in individual companies as well. One of the more effective measures to determine when the crowd has been buying too much is the stock’s Wall Street analyst ranking. Historically, top-ranked stocks have tended to underperform the market and vice versa as the lower-rated stocks tend to outperform.
Of course, it’s not as easy as saying that if Wall Street hates a stock it’s going to go up. No, you have to follow what we refer to as the “Smart Contrarian” approach and find those stocks that Wall Street SHOULD like, but doesn’t. A backdrop of positive fundamentals and technicals is part of this contrarian calculus.
A scan of our database models generated a list of companies that the analysts should be eyeing for upgrades based on their relative strength performance, strong technicals and a positive fundamental backdrop.
The following are three under-loved stocks that Wall Street is overlooking.
Under-Loved Stocks to Buy: W W Grainger Inc (GWW)
Industrial-related companies have led the market through 2016, as signs that the economy may not go into a recession are starting to build. When it comes to distribution of industrial goods, W W Grainger Inc (GWW) is a leader.
Grainger shares are trading 14% higher on a year-to-date basis, besting the S&P 500 that sits at just over one percent. The stock’s strength has it trading above intermediate- and long-term support levels, unlike a growing majority of the market that is beginning to see a technical slide. But there’s one catch: Grainger stock recently moved below its 50-day trendline, which always lights-up the caution light for technical traders.
Look at the Grainger operations and the fundamentals are bullish. Operating and profit margins that are among the strongest in their peer group and the company just raised their dividend 4.3% after announcing earnings results that beat the Street’s expectations by 12%.
Despite strength in the shares, Grainger stock is only recommended as a buy by 25% of the analysts that are currently covering the stock. The last upgrade came on April 5 when BMO Capital Markets initiated the stock as “Outperform” with a price target of $300.
Analysts in the hold and sell camp will likely feel the pressure of this one getting away from them, resulting in some upgrades that will help Grainger shares move higher.
Under-Loved Stocks to Buy: Fiserv Inc (FISV)
For the life of it, we can’t figure out how Fiserv Inc (FISV) continues to stump the analysts. Currently, 25% of the group has the stock ranked a buy, while the other 75% are sitting on the fence as holds. You know how many analysts recommended the stock as a buy last year at this time? Twenty-seven percent. FISV stock is trading 30% higher now.
Technically, the stock is a leader. Year-to-date returns are over 14.5% and the shares have only had two short periods where they weren’t pacing faster than the broad market.
Furthermore, Fiserv’s earnings announcement at the beginning of May beat analyst expectations … again. The company hasn’t fallen short on the earnings side in the last two years. Despite the huge rally, FISV stock’s forward price-to-earnings ratio is 21, putting it right in the middle of its peer group.
We’re expecting the continued relative strength of Fiserv shares to generate some upgrades and higher price targets with our own target of $120 during 2016.
Under-Loved Stocks to Buy: Duke Energy Corp (DUK)
The utility sector continues to garner attention as interest rates show no decisive outlook for 2016. The debate between one hike and two has income investors still looking at dividend-yielding stocks to help fill the income gap.
Duke Energy Corp (DUK) shares have been a leader against the market over the last year, while lagging many of its peer stocks. Shares have accumulated gains of 4% over the last 12 months against a slight loss of 1% for the S&P 500. The company announced earnings results that fell short of analyst expectations by a penny — a trend that has been seen through much of the utility sector.
In addition to low analyst expectations, the short sellers have been very active on DUK stock. Currently, the short interest ratio for the shares sits at 8.3, which adds a potential short-term catalyst for the stock. A break above the $80 level is likely to initiate a short covering rally that will also bolster prices.
Despite the earnings miss, expect to see a strong technical trend continue as investors march towards dividend-yielding stocks in 2016. Watch for Duke shares to cross above $90 in 2016.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.