The percentage of "buy" ratings is still relatively low, even amid the long-term uptrend
Unless you've been hiding under a rock or holed up binge-watching your favorite Netflix, Inc. (NASDAQ:NFLX) shows for a month -- in which case, bully for you -- you know it's been rocky on Wall Street since China's currency surprise in August, and with rate-hike timing still up in the air. From a long-term standpoint, though, U.S. stocks have been moseying steadily higher -- and bouncing back from a few corrections -- since 2009. Against this backdrop, one has to wonder: Is the massive skepticism potentially a good sign?
Not only are option buyers and investment managers warming up the bench -- analysts are, too. In fact, as the S&P 500 Index (SPX) rallied from 2012 to 2014, the number of analyst "buy" ratings on optionable stocks was dwindling significantly, Schaeffer's Senior Quantitative Analyst Rocky White noted. The percentage of "buys" is moving up again, but we still have quite a ways to go before reaching the late 2011 peak.
Going back even further, you can see just how bullish analysts were during the tech boom. The brokerage bunch collectively changed its tune in the early 2000s, and the massive amount of downgrades likely exacerbated selling pressure as the SPX fell below the millennium mark. This juxtaposition echoes our Expectational Analysis methodology that "euphoric" sentiment can mark tops and leave the market vulnerable.
That said, one could argue that the relative lack of "buy" ratings means stocks are very ripe for upgrades, should the SPX bounce back and close September back above the 1,991 level -- an area closely watched by Schaeffer's Senior VP of Research Todd Salamone. Drilling down into specific equities, a handful of stocks have outperformed the broader equities market in 2015, yet receive very little love on the Street. And on the flip side, a slew of underachievers remain at risk for downgrades.
Among the underloved SPX components with positive year-to-date returns is toymaker Hasbro, Inc. (NASDAQ:HAS). The shares have jumped more than 33% in 2015, and the company's partnership with Walt Disney Co (NYSE:DIS) could pay dividends this holiday season, yet only two analysts offer up "buy" or better opinions -- leaving plenty of room for bullish notes to lure more buyers. Plus, should HAS extend its journey higher, a short squeeze could add fuel to the fire. Currently, it would take roughly seven sessions to buy back all the shorted HAS shares.
In the same vein, Campbell Soup Company (NYSE:CPB) is just off a 16-year high of $52.37, yet boasts just one "buy" rating, compared to 11 "hold" or worse opinions. Plus, short interest represents more than a week's worth of pent-up buying demand, at CPB's average pace of trading. Should the soup king continue to muscle higher, a flood of upgrades and/or a short-covering rally could translate into additional tailwinds.
On the other hand, among the stocks with the highest percent "buys" that are down at least 5% in 2015 is Delta Air Lines, Inc. (NYSE:DAL). Although some airlines have capitalized on lower oil prices of late, DAL has struggled against the $48 mark for most of the year. Still, 100% of analysts consider DAL worthy of a "buy" -- making the stock a potential sitting duck for downgrades.
Meanwhile, energy names dominate the list, which includes Quanta Services Inc (NYSE:PWR) and NRG Energy Inc (NYSE:NRG) -- both of which boast 100% "buys," and the latter of which just hit a new three-year low of $14.81 today. In the same vein, Kinder Morgan Inc (NYSE:KMI) just fell to a three-year low of $27.93, yet 11 of 13 brokerage firms maintain "buy" or better ratings. Should these stocks extend their downtrends, a mass exodus of bulls among the analyst crowd could exacerbate selling pressure.
In conclusion, while the "bears are indeed 'winning'" -- as Schaeffer's contributor Adam Warner recently noted -- the fact that we're not yet in the euphoria stage of the sentiment cycle could bode well for the broad market going forward.