Wall Street analysts are supposed to know a lot about stock picking. After all, they get paid the big bucks to analyze different trends and data points, understand different markets and industries, and ultimately predict where stocks in their coverage universe are going to go over the next 12 months.
But, stock picking is a tough game, and as it turns out, analysts don’t really have an “edge” on the average Joe. According to a working paper from multiple universities published in 2017, analysts have been pretty bad at picking winning stocks over the past 35 years. During that stretch, the average annual return on stocks was inversely correlated to the average expected earnings growth rate of stocks. That is to say, the stocks which analysts thought wouldn’t grow profits by much, have consistently outperformed the stocks which analysts thought would grow profits by a lot.
This study isn’t isolated. It’s findings corroborate a 1996 study which arrived at a similar conclusion – analysts aren’t that great at predicting the future of stock prices.
Because of this, investors should take anything analysts say with a grain of salt.
But, analysts are still noteworthy voices on Wall Street, and their opinions do influence short term stock price movements. While analyst opinions should be taken with a grain of salt, they should also be acknowledged and contextualized.
With that in mind, let’s take a look at seven stocks which have not only scored Wall Street analyst upgrades over the past month, but are simultaneously supported by strong core growth fundamentals and look like good buys over the next few months.
Stocks to Buy That Wall Street is Upgrading: Target (TGT)
The Thesis: Analysts at Goldman Sachs think that the core fundamentals underlying the big box retail sector are favorable, and that Target is set to benefit over the next several years from a combination of those favorable fundamentals, its big e-commerce investments over the past several years, and a moderating cost base.
My Take: Target has been the hottest story in the big box retail world for some time, mostly because the company has rapidly expanded not just its e-commerce business, but its omni-channel business. These expansions have powered robust top-line momentum. They have also required a lot of investment, and have hampered margins. Now, those investments should phase into the rear-view mirror. As they do, top-line momentum will finally flow through into bottom-line momentum, and TGT stock — at just 14-times forward earnings — is ready to rip higher on that renewed bottom-line momentum.
AMC Entertainment (AMC)
The Thesis: Analysts at Credit Suisse think the recent sell-off in AMC stock to multi-year lows presents an attractive entry point considering that box office fundamentals should improve in the back-half of 2019, and lead to a nice rebound rally in the stock.
My Take: The big sell-off in AMC stock is overdone, and this stock will rebound in a big way into the end of the year. Box office results were sluggish through the first six months of 2019. But, they are off to a hot start in July, with strong numbers from the new “Spider-Man” movie and “The Lion King” remake. The numbers should get better in the fall and winter, headlined by the new “Frozen” and “Star Wars” movies. At the same time, AMC’s subscription movie-going program is adding subs at a record rate. This combination of improving box office fundamentals and continued subscription program growth should power a healthy rebound rally in AMC stock in 2019.
The Upgrade: In mid-July, Piper Jaffray upgraded shares of Crocs (NASDAQ:CROX) to “Overweight.”
The Thesis: Piper Jaffray’s channel checks show that Crocs sales trends have improved into the all-important summer season, giving credence to the notion that this brand’s momentum remains as strong as ever, and that shares should bounce back from their early 2019 rout.
My Take: CROX stock is a good summer buy. This company has engineered an impressive turnaround over the past several years. The turnaround hit a road-bump in early 2019. CROX stock dropped big in response. But, Piper Jaffray’s channel checks coupled with various other favorable data-points and trends indicate that Crocs has regained operational momentum over the past several months. Thus, the turnaround here remains alive and well, and CROX stock should bounce back this summer as second quarter numbers impress investors.
Best Buy (BBY)
The Thesis: Analysts at Guggenheim think BBY stock is the most undervalued large-cap retailer, and that despite this relative undervaluation, the core fundamentals underlying the business are favorable. This combination of favorable fundamentals and relative undervaluation should shoot BBY stock higher.
My Take: I agree with Guggenheim. Best Buy is a good and stable business with good and stable growth prospects, thanks to the fact that this is a defensible leader in the secular growth consumer electronics retail market (consumer electronics adoption is only going up in the long run). Yet, at just 12.8-times forward earnings, BBY stock is dirt cheap relative to other retailers (the consumer discretionary sector trades at over 21-times forward earnings). Thus, the relative undervaluation in BBY stock should not exist, and strong fundamentals will ultimately drive this stock higher long-term.
Stitch Fix (SFIX)
The Thesis: Analysts at Goldman Sachs thinks Stitch Fix is supported by favorable long term fundamentals (retail store closures imply a pivot into personal styling services, of which Stitch Fix is the leader). Those analysts further believe that geographic and product expansion will help Stitch Fix power big growth in the foreseeable future.
My Take: Stitch Fix is changing the game in the apparel retail world, from going to a store and randomly picking out clothes, to having clothes professionally picked for me and delivered to my house. This pivot will gain mainstream traction, since online personalized styling services are more convenient (you don’t have to go shopping) and yield better outcomes (it’s professionally curated). As it does gain mainstream traction, Stitch Fix will add users in bunches, and grow revenues and profits by leaps and bounds. All that growth will inevitably push SFIX stock higher in the long run.
The Upgrade: In mid-June, Wedbush initiated coverage on shares of Pinterest (NYSE:PINS) with an “Outperform” rating.
The Thesis: Analysts at Webush think Pinterest is fundamentally different than other social media platforms in its purpose (discovery/inspiration on Pinterest, versus sharing/communicating on other social media), and that this fundamental difference will enable the company to quickly ramp its advertising business over the next several quarters.
My Take: I really like PINS stock. Pinterest is a unique digital platform in that it doesn’t have overlapping functionality with other social media apps. Consumers go to Pinterest for inspiration or idea generation on various categories — not to share thoughts or post ephemeral videos. This use case differentiation will make it really easy for Pinterst to populate the platform with ads, because ads blend right in with the visual-first discovery aspect of Pinterest. As such, Pinterest’s ad business should ramp with great momentum over the next several quarters, and as it does, PINS stock will surge higher.
Stocks to Buy That Wall Street is Upgrading: Square (SQ)
The Upgrade: In early July, Raymond James upgrades shares of Square (NYSE:SQ) to “Market Perform.”
The Thesis: Analysts at Raymond James have been bearish on Square stock for most of 2019. They now think that the bear thesis has largely played out, as revenue deceleration and more tepid margin expansion is now priced in, and that the company’s debit card business is starting to gain traction.
My Take: Square stock is a long term winner. The world is pivoting away from cash payments, and towards non-cash transactions. Square is at the heart of this pivot, both facilitating and building an ecosystem around such non-cash transactions. The company is also rapidly innovating and expanding their business portfolio to include things like debit cards and a peer-to-peer payments platform. This expansion of services in a secular growth market means that Square projects as a big-time grower for a lot longer. Thus, so long as the consumer and market backdrops remain favorable, SQ stock should trend higher.
As of this writing, Luke Lango was long TGT, AMC, CROX, BBY, SFIX, PINS, and SQ.