Buzzy Sector Overdue for Bullish Analyst Attention

Plus, one sector that looks ready for a few downgrades

Senior Quantitative Analyst
Feb 3, 2021 at 7:00 AM
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The chart below is a caution sign to contrarians. I aggregated the buy, hold, sell data from Zacks, and plotted the percentage of buy recommendations on all stocks. The percentage of buys has spiked since the Covid-19 crash. Nearly 60% of all recommendations are buys.

Analysts typically follow price action, so with stocks hitting an all-time high, optimism is not a surprise. I think it is noteworthy, however, that optimism is reaching above the prior peaks over the past 10 plus years of rising stock prices. In the analysis below, I am breaking down these numbers to get a better sense of what analysts are so bullish on.

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Love Growing for Small Caps

The chart below compares the percentage of analyst “buy” ratings for stocks in the large-cap S&P 500 Index (SPX) versus the small-cap S&P 600 Index (SPCY). Both indexes are seeing an increase in the percentage of buy recommendations, but the small-cap index is increasing faster. The percentage of buys on the small-cap index moved above 50% for the first time in about five years.

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This next chart shows the difference in percent buys between the large-cap and small-cap index. Back in 2015, there was not much preference either way between large and small-cap stocks based on this metric. Then analysts began preferring large-cap stocks over small-cap stocks until late 2018. Since then, the spread has narrowed but there’s still a preference toward large-cap stocks. If the trend since late 2018 continues, it suggests some opportunities might exist in the small-cap space as they get analyst upgrades.

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Analyst Buys Per Sector

We have stocks broken down into about 40 sectors. The table below shows the sectors which analysts became more bearish on over the past year. The first sector on that list, alternative energy, is interesting when you consider the price action. A year ago, 66% of recommendations for the sector were “buy.” Despite huge returns from those stocks over the past year, now, only 54% of recommendations are a “buy.”

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Here is a list of the stocks in the alternative energy sector. I also have their 52-week returns and some analyst percent buy data. Analysts are extremely bearish on some of these stocks despite huge returns over the past year. If a lot of bears finally capitulate, it could create an unwinding of bearish positions that leads to higher prices.

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Next, here are the sectors in which analysts have become more bullish. You would expect this from sectors that performed well, so I’m going to focus on a sector that has performed poorly.

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Here is a list of banking stocks that have fallen over the past year but analysts like them more now than a year ago. If you’re cautious because of the overall bullishness from analysts that I talked about at the top of the article, this might be a good list of stocks to consider selling.

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