Most analysts look for the same set of characteristics when designating companies with ‘buy’ labels. Typically they want to see earnings growth and positive share price momentum before they are willing to recommend purchase. The requirement that shares exhibit technical strength ensures that they can never include the best bargains on their ‘top pick’ lists.
Sell ratings are rare to begin with. Getting on the ‘bad list’ usually means the stock has already been beaten up badly. Most likely the earnings news has been disappointing too. What researcher wants to put his reputation on the line with shares that have been sinking, no matter how cheap they’ve become?
Bespoke Investment Group broke down the S&P 500 companies by decile rankings based on positive/negative analyst ratings as of Dec. 31, 2011. The surprising results are shown below.
Through December 5, the top-rated group had gained 12.69% YTD. That’s not too bad on an absolute basis. But wait, there’s more…
The fifth (middle-of-the-pack) and the seventh lowest decile groups significantly kicked the ass of the most favored group.
Contrary Thinking = Value Investing = Profit Potential
Almost all the best stocks from the lowest-ranked group had suffered P/E compression along with depressed earnings in 2011. They were able to rebound dramatically in price as EPS turned around while the multiple reflated.
39 out of the 50 showed positive total returns. 15 of the 50 were ahead by more than 25% as of Wednesday.
Whirlpool’s (WHR) shares more than doubled while its P/E tripled (despite lower absolute earnings). Last year’s low expectations made for great 2012 gains. It was the same story with Computer Sciences (CSC). EPS declined but the stock shot up as the P/E more than doubled.
What are some stocks that are out-of-favor and much despised today with the chance to be heroes in 2013?
Agricultural: Potash $39.52 (POT) and Mosaic $53.86 (MOS)
Health-Care: Express Scripts $53.99 (ESRX) and Lab Corp $84.78 (LH)
Discount Retail: Kohl’s $44.09 (KSS)
We are already holding POT, MOS, ESRX, LH and KSS in the Virtual Value Portfolio. I’m going to increase the allocation to POT to 5% by buying another 2% on Monday – in this case, adding 51 additional shares.
Update on Market Shadow’s Virtual Value-Based Model Portfolio:
We’re off to a respectable start with Paul Price’s blend of value selections in his virtual portfolio. Paul’s value-based portfolio was started on October 26, 2012 with approximately equal dollar weighted positions of the stocks listed above (3% initial positions). We continue to hold a cash reserve position of about $21,000 of the original $100,000 value.
We have made a few additions since the initiation date, as well as one profitable closed-out sale (ANF). The list above shows our results had we simply bought every stock indicated at the times and prices available on the publication dates (or on the following day for evening postings).
The results reflect only the invested part of the portfolio. They do not account for any dividends earned to date. Actual results would be higher by that amount. We intend to give a fully detailed accounting as our software upgrades kick in.
The raw numbers show a $4,010 gain (+ 5.18%) since the October 26, 2012 inception date, excluding dividends.
We’re going to bring our virtual Potash Corp. (POT) position to a full 5% position by adding 51 additional shares @ $39.46/share on Monday, December 10, 2012. Read Paul’s article: Become A Legal Holder Of POT.
Paul’s Disclosure: Long POT, MOS, ESRX, LH, KSS and, currently, all stocks listed in the virtual portfolio. This could change at anytime, without notice.
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