We're Not The Only Ones In The Parade

9/26/2016


Have you ever exited a stadium after a concert or ballgame, then realized you left your jacket on the seat back? If so, you know how tough it can be to fight against the crowd.

As investors, we understand the importance of contrarian thinking. Sometimes we must buy stocks when others are selling. It's part of doing business, and such stances have frequently paid off for us. At the moment, four of our recommended stocks — Citrix Systems ($85; CTXS), D.R. Horton ($30; DHI), F5 Networks ($119; FFIV), and Owens Corning ($52; OC) — earn average ratings of Hold from the brokerage community.

Of course, nobody wants to fight the current all the time. Fortunately, such contrarianism isn't always necessary, because the crowd is often right. Most of the time, when people flee a building while shouting, "Fire," there's actually a fire.

Sticking to your convictions is easier if other people will take the same stand. With that in mind, we considered three ways the investment community shows support for a stock:

1) Brokerage ratings. Nearly two-thirds of stocks in the S&P 500 Index average brokerage ratings of Buy or Strong Buy. These top-heavy ratings stem in part from the innate optimism of analysts, and in part from the fact that many analysts choose not to cover stocks they dislike, which makes for fewer Hold and Sell ratings. Just 34% of the stocks in the index earn a Hold rating, with a mere four Sells.

2) Rising profit estimates. While Buy ratings tell us an analyst likes a stock, an increase in profit estimates lets us know that an analyst is becoming more confident in its ability to grow.

3) Relative strength. This pure momentum indicator suggests investors believe in a stock's prospects.

The table below presents seven A-rated stocks with brokerage ratings of Buy or better, a positive trend in profit estimates, and market-beating returns over the last three months and so far this year. These are stocks we like that others also recommend.

Do we need the confirmation from the rest of the market? Not at all; we spend plenty of time standing on our own islands. But it's more fun when other people agree with us.

STOCKS OTHER PEOPLE LIKE, TOO
All seven A-rated stocks below earn brokerage ratings of Buy or better, have seen at least 0.5% increase in profit estimates for the year and next year, and outgained the S&P 500 by at least 3%. Three (in bold) are on our buy lists.
Est. Profit
--- Growth ---
Est. Change,
Last 90 Days
Price Gain
Above S&P
---500 ---
Company (Price; Ticker)
Curr.
Year
(%)
Next
Year
(%)
Curr.
Year
(%)
Next
Year
(%)
Average
Brokerage
Rating
3
Mos.
(%)
This
Year
(%)
Quadrix
Overal
Score
Applied Materials
($31; AMAT)
49
27
15.6
21.1
Buy
25
58
94
Facebook ($130; FB)
73
28
9.1
8.5
Buy
10
18
88
Lam Research
($93; LRCX)
10
7
1.9
2.2
Buy
7
12
97
LKQ ($35; LKQ)
29
14
1.5
0.5
Buy
4
14
90
Mohawk ($206; MHK)
22
7
2.0
1.3
Strong Buy
2
3
96
Priceline
($1,464; PCLN)
17
16
2.2
1.7
Buy
5
9
89
Qualcomm
($64; QCOM)
(7)
11
5.5
2.5
Buy
14
21
93
Note: Quadrix scores are percentile ranks, with 100 the best.

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