Finding the market’s diamonds in the rough—stocks with big potential that other investors haven’t noticed–isn’t easy, especially with large companies. Dozens of Wall Street firms track their every move, so there is plenty of publicly available analysis that should keep investors up to speed.
Sometimes, however, it can take a while for investors to focus on what analysts are saying. That can spell opportunity, and it happens surprisingly often.
Barron’s found 19 S&P 500 stocks, including giants such as Apple (ticker: AAPL) and Netflix (NFLX), with improving analyst sentiment as well as declining stock prices. If the analysts are right, then that paradox could resolve itself with the 19 stocks outperforming the market in coming months.
The criteria for our latest screen were threefold. For starters, analysts had to be getting more bullish, with more rating upgrades than downgrades over the past three months.
Next, a greater share of analysts than average had to like each stock. The average Buy-rating ratio for stocks in the S&P is about 55%, so every stock that made the cut scored above that level. No companies with just a few Buy calls and lots of Sell ratings were included, even if they caught a few upgrades in recent weeks.
Finally, the stocks’ prices had to have fallen over the past three months, as evidence that sentiment among investors hasn’t caught up with analysts’ optimism. That distinguishes our list from the many companies that perform strongly after upgrades on Wall Street.
Textron (TXT), for example, has picked up four upgrades to Buy in the past three months as analysts focus on how the industrial conglomerate is benefiting from an economic recovery. Its stock is up more than 40% over the same span.
The 19 stocks with potential pop are, in no particular order: Paycom Software (PAYC), Tyler Technologies (TYL), Verisk Analytics (VRSK), Nextera Energy (NEE), AES (AES), Akamai Technologies (AKAM), Align Technology (ALGN), Thermo Fisher Scientific (TMO), Apple, Adobe (ADBE), IPG Photonics (IPGP), Monolithic Power Systems (MPWR), Leidos (LDOS), Hologic (HOLX) Eli Lilly (LLY), Netflix, Synopsys (SNPS), ServiceNow (NOW) and Advanced Micro Devices (AMD).
Overall, the 19 stocks are down an average of about 8% over the past three months. The S&P 500, for comparison, is up about 8% over the same span.
Improving Analyst Sentiment
Analysts are warming to these stocks while investors sit on the sidelines.
The stocks trade at an average of about 33 times the per-share earnings expected for 2022, which is a premium to the overall market, at about 20.5 times. That is one reason shares might be lagging.
Value-oriented stocks, which tend to have lower price/earnings ratios, have beaten growth stocks lately. The Russell 1000 Value Index is up about 14% over the past three months, outperforming the Russell 1000 Growth Index by about 13 percentage points.
For some of the 19 stocks to rise, investors might have to shift back to growth—the darling of the pandemic—from value. That isn’t a sure bet, given that the postpandemic boom is drawing investors to cyclical names, which like value shares, tend to have lower valuations.
But many of the companies on the list, including the tech names, are impressive, blue-chip firms. It might be a good time to snatch up those stocks before investors, overall, catch on that Wall Street sees brighter days ahead.
A stock screen, of course, isn’t an investment thesis. It is a way for fundamentally minded investors to narrow down their choices and start kicking the tires on stocks.