15 Stocks With Overdue Upgrade Potential

Analysts are not good at timing bottoms, and this can be taken advantage of

Senior Quantitative Analyst
Jan 10, 2024 at 9:04 AM
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Analysts are giving a "buy" recommendation to the fewest number of stocks in over three years. That’s according to buy/sell/hold data from Zacks Investment Research. Looking at the chart below, about 55% of recommendations were buys in early 2020 as the Covid pandemic started. As stocks soared from the 2020 lows, so did the percentage of buy recommendations from analysts. It peaked with the market in early 2022 and declined as the market fell that year.

Despite a strong 2023, with the S&P 500 Index (SPX) gaining 24% on the year, the buy recommendations from analysts were flat. Fewer analysts buys means more potential for upgrades which can have bullish implications. However, the current level is still high compared to the data prior to 2020.

This week I’ll break down analyst buy/sell/hold data over the past year by sector. Also, I’ll look at some individual stocks as well, focusing on where analysts are moving in the opposite direction as the price.

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Analyst Buys Per Sector

Analysts were about flat year-over-year as far as percentage of buys on stocks. I broke this down by sector and only nine of 30 sectors analyzed showed an increase in analyst percent buys. Those sectors are below. The percentage of buys for the construction and materials sector went from 48% a year ago to 57% now. That makes sense given the strong performance of stocks in those sectors. They averaged a gain of 59% compared to the S&P 500 which gained just over 20% over the past year. It’s interesting that almost all the sectors in the table below underperformed compared to the S&P 500. Analysts seem to be making a bet that these sectors will catch up to the rest of the market. When analysts move in the opposite direction as price, I tend to follow the price action.

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Here are the 10 sectors which had the biggest drop in percentage buys from analysts over the past year. The first sector on the list, finance and credit services, is interesting. Despite those stocks averaging a return of 56% over the past 12 months, the percentage of buys from analysts went from 50% a year ago to only 41% now. I could see this sector rally going forward.

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Analysts Going Against Price Action

When analysts and market prices are going in opposite directions, I expect the analysts to be wrong more times than not. When they’re proven wrong and forced to capitulate, it fuels more action in the direction of the market prices. The list of stocks below have endured substantial downgrades from analysts over the past year, yet gained at least 50% in value. I would consider this a good list to reference when searching for potential buys.

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Below, I have the opposite list of stocks. Even though these stocks have been down over the past year -- while the S&P 500 simultaneously gained over 20% -- more analysts are telling you to buy them. However, I would be very wary, as analysts are not good at timing bottoms.

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