When you're looking to research a stock, whom should you listen to, Wall Street or Main Street? Wall Street has its analysts and they don't have a good track record. They are known to be short-sighted, overoptimistic, and never negative (seriously, when was the last time you saw something with a sell rating?). Savvy investors read their research but ignore their buy and sell ratings. So whom can you trust?
At Motley Fool CAPS, we use the collective opinion of 165,000 investors (Main Street) to inform our stock ratings. Members are scored on their accuracy and overall outperformance of the S&P 500. We then aggregate all the ratings such that members with higher scores have more influence on a stock's CAPS rating. This gives us some of the best ratings around.
Let's look at a couple of stocks.
|
Stock
|
Analysts Buy Rating (out of 5)
|
CAPS Rating (out of 5)
|
P/E
|
P/B
|
|
Intuitive Surgical (Nasdaq: ISRG )
|
3.5
|
***
|
43.7
|
7.11
|
|
American Capital (Nasdaq: ACAS )
|
2.9
|
****
|
N/A
|
0.56
|
Source: Yahoo! Finance; P/B equals price-to-book ratio.
Intuitive Surgical
After a 125% increase in its price in just one year, you should rightly be skeptical of a stock, especially when it's trading for more than seven times book value. Wall Street still thinks Intuitive Surgical is a buy, though some analysts have begun to downgrade the stock to hold. Enough investors in CAPS believe Intuitive Surgical will underperform the market that the rating dropped from four stars to a neutral three stars this past March.
Long-term, Intuitive Surgical looks like a winner. A recent SWOT analysis (strengths, weaknesses, opportunities, threats) of the company shows it has high barriers to entry, great brand strength, a near-monopoly, and high switching costs. All these are conducive to the company winning out in the long run. The problem is, at 43.7 times earnings, there is no margin of safety in the stock price, so I would keep this one on a watch list.
American Capital
Wall Street doesn't like this stock as much as Main Street, which is bullish. What gives? American Capital made some terrible investments in commercial mortgage-backed securities and has suffered huge losses. Management has been proactive, though, and the company recently restructured substantial debt, has gotten out of various investments to raise cash, cut costs, and all the while maintained a diversified portfolio. With shares trading at half of book value, there is definitely value there if investors can stomach the huge amounts of debt.
Alternative ideas in the same industry include Apollo Investment (Nasdaq: AINV ) and Ares Capital (Nasdaq: ARCC ) . Apollo and Ares both got out of many investments, raised cash, and have lower debt levels than American Capital. Plus, they pay an 11.1% dividend and a 10.3% dividend, respectively.
Given Wall Street's perpetual bullishness on virtually every stock out there, you should turn to the completely free CAPS community and harness the wisdom of the crowd to research stocks.
RSS Headlines
Fool UK