Why It’s Better To Go For The Stocks Wall Street Analysts Hate Instead Of The Ones They Love

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Suppose your son falls in love with a handsome Wall Street analyst. what should you do? Don’t try to stall the marriage, but don’t take your future daughter-in-law’s advice on which stocks to buy.

For more than two decades, I’ve been tracking the fortunes of the four stock analysts most loved at the start of each year.

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Last Year, Analyst’s Favorite Stock As the Year Started Amazon.com
AMZN
, microsoft
MSFT
, Burlington Stores (BURL) and Valero Energy
flea
, Collectively they rose 26.7%, two percentage points less than the Standard & Poor’s 500 total return index. Microsoft and Valero beat Index; Amazon and Burlington are behind.

A year ago the most undervalued stocks were SecureWorks
SCWX
Southern Copper
SCCO
McKerich Co
MAC
and American Airlines
came
, As a group, they rose 23.5%, nearly three points behind the likes of analysts.

ominous evidence

So far, not too bad. But wait, there’s more. I have been tracking Adored vs Despised stocks for over 23 years. Preferred shares have an average gain of 7.9%. For insignificant shares, it is 8.1%. And it’s 12.8% for the S&P 500.

Therefore, analysts’ favorites have failed to outperform the stocks they hate most, let alone the market average, which has outperformed both.

In 23 outings, Adored Brigade defeated Despised 12 times, and lost 10 times (there was a tie). Analysts’ darling has beaten the S&P 500 only seven times out of 23.

I matched the recommendations of analysts from Jacques Investment Research this year, as I have for most of the year. And now, let’s take a look at what stocks analysts loved and hated most as of early 2022.

very favorite

thirty one analysts rate Amazon.Com With a single “buy”, not a single “hold” or “sell”. A year ago, Amazon had 32 fans, with no disagreements. That didn’t stop the stock from crashing heavily in the market. It rose only 2.4% in 2021, while the S&P jumped over 28%.

Microsoft There are 23 fans among analysts, with no disagreement. The stock performed well in 2021, returning more than 52%. I estimate Microsoft to return 10% to 15% next year. Earnings should increase by about 15%, but I think investors will want to pay less per dollar of earnings if current interest rates go up.

Tenable Holdings (TENB) comes in third place with 15 buy ratings and no disagreement votes. The firm, based in Columbia, Maryland, helps companies assess and mitigate their vulnerability to cyber attacks. I dislike the stock because it has more debt than equity and trades at 133 times estimated earnings.

Fourth, with 14 affirming and zero opposing views, is ZoomInfo Technologies (ZI), not to be confused with Zoom Video Communications (ZM). ZoomInfo, which runs a marketing platform, sells for 74 times the estimated revenue. I’d rather own the zoom video.

I believe that preferred stocks, as a group, are at risk from rising interest rates. Inflation is in the air, and the Federal Reserve wants to reduce it. If rates rise, investors will be willing to pay less for every dollar of expected earnings over three to five years.

Insignificant

Three stocks were unanimously disdained by four analysts, with no “buy” ratings and four “sell” ratings. They clover health investment (cloves), GameStop
GME
And J. Sainsbury Plc (JSAI).

Clover, which runs Medicare Advantage health plans and is making loss-making, is also striving to become a leader in health care data collection and analysis. It is a favorite of online traders who prefer “mem stocks”.

The same is true of GameStop, a retailer of electronic games and game players. It’s up 605% over the past year, despite the fact that it hasn’t turned a profit since 2018. Residents of the Wall Street Bets website prefer to pursue stocks that hedge funds are selling short (betting on a decline).

J. Sainsbury’s is a London-based chain of supermarkets and convenience stores, second only to the United Kingdom in terms of market share. Its profit margins have declined, and it scores poorly on the Altman Z-score, a measure of financial strength. I don’t find the stock encouraging, but not objectionable.

4th on the despised list Consolidated Edison
Ed
, a large New York electric utility. Its revenue growth has been negative for the past decade, and its earnings growth has been modest.

Overall, I think insignificant stocks have come down significantly this year. Yet I wouldn’t be completely shocked if they beat analysts’ favorite stocks in 2022.

Disclosure: My wife, Katherine David, is an investment manager at Dorfman Value Investments. He and his customers own Amazon.com and Microsoft.

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