Take a chance and go against the flow, new research suggests
Published 24/06/2010 | 05:00
THERE was some thought-provoking research by Bloomberg this week that may give investors courage to go against the flow. The research shows Wall Street's lowest-rated stocks have turned into this year's best performers.
One example of this trend was regional lender Huntingdon Bancshares, which had twice as many 'sell' ratings as 'buys' in December and has since jumped 66pc this year, posting the fourth-largest advance in the Standard & Poor's 500 Index.
A better known company this side of the Atlantic which followed the same pattern was Eastman Kodak-- it gained more than 20pc after more than 30pc of the analysts covering the stock at the start of the year, recommended selling.
"The best kind of company to own is the one in which the vast majority of analysts are negative, but you see things turning around," Thomas Wilson, managing director of Brinker Capital, told Bloomberg. "I don't really want to own the stock that has nothing but favourable ratings because the expectations are so high." While this sentiment may sound almost childishly contrarian, it is really just a way of re-stating the fundamentals of value investing.
The reverse also appears true: Coca Cola had 14 'buy' and 1 'sell' rating in December, but has lost 8.2pc this year.
"The crowd tends to get you off into the wrong area at the wrong time," said Barry James of James Investment Research. "When the analysts are all on board saying only good things can happen, it's already built into the price. There's not a lot of upside left."
The report also suggests analysts turning optimistic may provide fuel for a stock to rally. At least 11 analysts raised their rating on PNC Financial Services to 'buy' this year as the Pittsburgh-based lender gained 19pc. The 50 companies in the S&P 500 that had the most upgrades to 'buy' have risen 11pc on average this year, compared with a 1.7pc advance for those with the most downgrades to 'sell', according to data compiled by Bloomberg.
While such a rule of thumb is not without dangers and many stocks are marked down simply because they are trash, it spurred Sharescope to look for the 10 best and worst Irish stocks as we enter the second half of the year. Unfortunately, the sample of 20 is small and many Irish stocks are not followed enough to draw meaningful conclusions, but there are interesting trends.
Among the poor performers on the ISEQ this year, home builder McInerney stands out as the worst in terms of performance and recommendations. The stock has just five analyst recommendations on Bloomberg, three sells and two holds. Another poor performer has been Irish Life & Permanent, but this company has seven 'buy' and just three 'sell' or 'holds'.
Curiously, the best performers are small caps such as Petroneft (up 104pc) and Oglesby & Butler, which only have one, a 'buy' for Petroneft, between them. Among what passes for a large cap on the Irish market, Smurfit and Aryzta are stocks much loved by analysts with more than seven 'buy' or equivalent recommendations each. Among the banks, Bank of Ireland has a rake of 'buy' recommendations while the views on Allied Irish are much more mixed.
It will be an interesting game to revisit this list at the end of the year and see how they have performed. The Bloomberg research suggests McInerney may be the gem while Smurfit and Aryzta are the zombies. It certainly does not look like that right now, but time will tell.