Anyone can get lucky once in a while. The same goes for the
so-called "experts" on Wall Street. But when the overwhelming
majority of experts agree on a handful of stocks, investors should
take notice. When a stock has, say, 20 analysts covering it -- and
all 20 think the stock is a strong 'Buy' -- it's pretty clear that
big things are expected.
Now, it's easy to go along with the crowd and jump on a stock's
bandwagon in such a scenario. But, buyer beware. This is precisely
the type of circumstance when an investor's contrarian side should
take root. Can an overwhelming bullish sentiment be a bad thing?
Naturally, you'd like to see more 'Buy' ratings than 'Sell'
ratings. However, a stock with all 'Buy' ratings might not have any
upside left. It's certainly possible. But for every stock that
sputters after a good run, there are companies like
Apple (Nasdaq: AAPL)
Google (Nasdaq: GOOG)
that -- just when you think they've run up as much as possible --
will still beat earnings estimates or otherwise harness a new,
long-term profit catalyst that will grow profits for years to come.
This is the type of stock we're looking for in this week's Inside
For starters, we wanted to look at stocks with plenty of analyst
coverage. Then, we screened for stocks with a large number of 'Buy'
ratings. Based on the contrarian argument we discussed above, we
also needed a way of filtering out stocks that have likely hit
their ceilings and identifying stocks that are underpriced relative
to their potential earnings growth. For this, we used a simple a
simple formula: Price/Earnings to Growth (
). It is calculated by taking a stock's P/E ratio and dividing it
by its estimated earnings growth. (My colleague Carla Pasternak
gave a terrific explanation of the importance of PEG in the
February issue of
.) This allowed us to find stocks that, despite their overwhelming
number of 'Buy' ratings, may still have some long-term upside.
With these points in mind, the StreetAuthority research staff
recently ran a screen for the following criteria:
-- S&P 500 stocks with at least 10 analysts covering the stock
-- 'Buy' recommendations that amounted to at least 80% of total
-- PEG of less than 1, signifying that the Street is paying nothing
for earnings growth
We came up with the following results:
Analyst Buy Ratings
Buy % of Total
Surprise, surprise -- our friends Apple and Google are on the list.
The results seem to suggest that these stocks, despite being
branded as "growth" stocks, may actually be underpriced. Comparing
Apple's P/E of 20 to its 5-year historical valuation of 30.5 and
Google's P/E of about 27 to its 5-year historical valuation of
about 46.9 would seem to confirm this.
Another interesting name on the list is
CVS Caremark (
. CVS is the largest drugstore chain in the United States, with
about 7,000 locations. The company purchased Caremark, a pharmacy
benefits manager, in 2007. Shares took a hit in November 2009 when
the pharmacy benefits division announced that it lost about $3.7
billion in contracts and that margins would be slimmer going
forward. Pharmacy benefit managers use their size as negotiating
power to get cheaper drug prices for customers and are a key piece
of the puzzle in lowering healthcare costs.
Another profit catalyst on the horizon is the coming wave of drug
patent expirations. CVS earns a fee for filling prescriptions, and
more affordable drugs mean more prescriptions to fill. Not only
that, but CVS actually has more bargaining power with generic drug
companies than Big Pharma, so it usually earns a higher fee for
generics than branded drugs. (Side note: CVS is also a big
supporter of biogenerics. More on that here.)
If CVS can manage to turn around its pharmacy benefits division and
reap the long-term benefits of an increasing amount of generics on
the market, it will go a long way to proving the experts right on
Disclosure: Brad Briggs does not own shares of any security
mentioned in this article.
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