5 Stocks Experts Like - Investment Ideas
September 15 2011 - 8:00PM
Zacks
Last night I read an article that polled the most renowned music
experts on the greatest music albums of all time. The list of the
top 5 includes
Rubber Soul, Sgt. Pepper's Lonely Hearts Club
Band and
Revolver by the Beatles,
Highway 61
Revisited by Bob Dylan, and Marvin Gaye's
What’s Going
On. (I have to admit, the Beach Boys actually made the experts'
top 5, but this is my article and I'm vetoing them. They're OK, but
a top 5 album?) Looking at the list, I would have to say that
although they aren't my personal top 5, these are some pretty damn
good albums.
So on my train ride into work this morning, I thought about
those music experts and their strong consensus picks and wondered
if expert stock analysts could provide insights or other
information that would lead to strong, profitable stock picks. On
first thought, you'd think since all this analyst information is
highly public, that it's already priced into the stocks and you
can’t profit from it. But, herein lies a market anomaly. Let's take
a closer look.
Stock analysts provide many different types of data on companies
from buy/hold/sell recommendations to earnings estimates to
projected growth rates. I tested all this information to see if you
can beat the market with it.
Beginning with a universe of the largest 3000 stocks, I ran
tests from January 2000 until June 2011 by building portfolios
based on each of these analyst metrics. The average annualized
return and standard deviation are below:
![](http://www.zacks.com/images/upload_dir/1316189263.jpg)
The above results show that four of these measures outperformed
the selection universe and three underperformed. It's interesting
to note that the analyst ratings in and of themselves didn't
perform better than the selection universe, but the change in
analyst ratings did extremely well. So don't just buy a "Strong
Buy" because it's a "Strong Buy." It's better to buy a "Strong Buy"
that moved from something else (like a "Sell" or "Hold") to a
"Strong Buy."
These results also indicate that a company with a high 3-5 year
projected growth rate is something that should be shunned like the
plague. As you can see, high expected growth usually ends badly.
Excluding those companies with expected growth rates above 20%, the
returns improve dramatically (10.8% versus -3.5%). Remember this
the next time you hear someone hawking a stock with projected
growth rates above 20%!
Based on the performance figures above, here's a method for
finding stocks to take advantage of the Analyst Anomaly:
- First, create a liquid, investible set of the stocks with
the largest 3000 market values and average daily trading
volume greater than or equal to 100,000 shares (if there's not
enough liquidity, it'll be hard for you to trade).
- Next, due to the uncertainty regarding some foreign issues,
keep only U.S. common stocks.
- Add another filter by selecting the top 100 stocks with the
highest percentage change in the average rating over the last four
weeks. (You want improved consensus ratings.)
- Then select only those top 50 stocks with the highest net
revision (up minus down) over the last four weeks. (You want to
maximize the number of upgrades and minimize the number of
downgrades.)
- Of these 50, pick 25 with the largest percentage increase in
the last four weeks of the current quarter's earnings estimate.
(Improving quarterly earnings estimates is good.)
- Finally, select the top 10 stocks with the highest
percentage increase of the last four weeks in the current quarter's
earnings estimate. (Improving annual earnings estimates is good
too.)
Here are 5 great stocks based on analyst data (09/15/11):
COF – Capital One Financial Corp.
Capital One is a bank holding company that gathers deposits and
makes loans. Over the last month, analysts have upgraded the stock
to Outperform and increased both their quarterly and annual
earnings estimates.
IP – International Paper Co.
International Paper operates as a paper and packaging company
with worldwide operations. Analysts we surveyed have been upgrading
ratings and earnings estimates for this company, which pays a nice
dividend too.
NDAQ – The NASDAQ OMX Group, Inc.
Another company with worldwide operations, NASDAQ provides
trading, clearing, exchange technology, and securities listing
services. A few analysts have upgraded their opinion for this
company, but of particular interest is the number increasing their
earnings estimates.
PRIM – Primoris Services Corporation
Primoris, a specialty contractor and infrastructure company,
provides a range of construction, fabrication, maintenance,
replacement, water and wastewater, and product engineering
services. Analysts like this company and have been increasing their
earnings estimates due to Primoris receiving many new contracts.
Last month, the company also increased its dividend.
HURN – Huron Consulting Group Inc.
Huron provides operational and financial consulting services in
the US. Last month, analysts upgraded this firm to "Buy" from
"Neutral". Earnings estimates have also been increased due to
strong demand for the services this company provides.
To conclude, this article presents examples of how you can use
pieces of information provided by analysts to beat the market. But
just remember, don't believe everything analysts say. Use your own
discretion to evaluate what's meaningful and what's not. Everyone
has different tastes, so be aware of that.
In case you were wondering, my personal list of top 5 albums
ever produced includes: the Beatles' Sgt. Pepper, Dylan's
Highway 61, Gaye's What’s Going On, The Clash's
London Calling and The Sun Sessions by Elvis.
Although it doesn't discuss music, there is a website that
discusses various types of stock market anomalies and how you can
profit by them. Please visit hema.zacks.com and "profit on!"
CAPITAL ONE FIN (COF): Free Stock Analysis Report
HURON CONSLT GP (HURN): Free Stock Analysis Report
INTL PAPER (IP): Free Stock Analysis Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
PRIMORIS SERVCS (PRIM): Free Stock Analysis Report
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