Plus, 25 stocks at risk for downgrades
This week I’m looking at broker recommendations provided by Zacks Investment Research. For each stock, we know the number of analysts in coverage along with their rating. Ratings can be "strong buy," "buy," "hold," "sell," or "strong sell." We generally look at ratings as a contrarian indicator because analysts generally follow stock prices rather than lead them. Therefore, when a stock is moving higher but analysts haven’t jumped on board yet, it’s only a matter of time before they do. Once analysts start upgrading a stock, it creates more tailwinds that lead to even more gains.
Below, I look at the percentage of "buys" across all stocks to get an overall sense of how analysts have viewed the market. Then, I break it down further by stock, which may lead to some compelling individual trade ideas.
Looking Back On the Optimism of the Tech Boom
First, here’s a long look back at the percentage of "buys" on current S&P 500 Index (SPX) stocks. The euphoria during the tech boom is clear. Around 2000, nearly three-quarters of stock recommendations were "buys." There was a major sea change after that event, and despite strong markets since, the percentage of "buys" has been unable to climb back to 60%.
Analysts Remain Skeptical, Despite a Bull Market
In this next chart, I zoom in on data since 2007. It never ceases to amaze me when I look at the data over the past several years that while stocks have skyrocketed, the total percentage of "buys" on individual stocks has been decreasing. It finally bottomed in March of last year at almost exactly 50%, but has increased since then to 53%. Analysts have a lot of upgrades to make before that percentage reaches its 2011 high of 59%.
Outperforming Stocks With Few 'Buy' Recommendations
If you’re looking to create a watch-list of stocks for potential long ideas, the list generated from my simple filter below wouldn’t be a bad place to start. I looked at S&P 500 stocks that have outperformed the S&P 500 since October 2011 (the S&P sports an annualized return of 13.3% since then) and saw a decrease in the percentage of "buy" recommendations from analysts. In other words, analysts have become more bearish since then, and have been completely wrong.
I narrowed this list of stocks down to the 25 stocks with the lowest percentage of "buys." The theory here is that analysts could soon capitulate and begin upgrading these hot stocks, which will then provide even more upside fuel.
Underperforming Stocks With High Percentage of 'Buys'
The list of stocks below could be a starting point for short ideas, or at least stocks you might want to be cautious about. It’s simply the opposite of the list above. These stocks have underperformed the S&P 500 but have a higher percentage of "buys" now than in October 2011. I once again narrowed down the list to 25 stocks by showing those that have the highest percentage of "buy" recommendations.
