Looking for ideas on how to find stocks poised to outperform? One source is the sell-side ratings from various banks and firms, usually phrased positively as "buy" or "overweight."
Sell-side analysts produce research that is given to brokerage clients for their investment considerations. If the research is from a reliable analyst, a positive report can give a big boost to a stock's share price.
Researchers often cover a specific industry or sub-sector in order to become experts in their field. Their advanced knowledge helps them to utilize complex forecast models and ultimately deliver recommendations on stocks or other securities.
The recommendations are typically phrased as "buy," "sell," or "hold." Some companies issue an "overweight," "underweight," or "hold" rating.
The dangers of group think
Unfortunately, even the best of the best can get swept up by crowd mentality.
Imagine a group of three sell-side analysts. Two believe a company is a "buy," the third believe it is a "sell." It's reasonable to assume the group's final rating will be "buy," the opinion of the majority.
Sometimes markets will prove that the outlying opinion, in this case the "sell" rating, ends up being the correct one. This is a fundamental flaw of "group think," and it has led to several bad calls on Wall Street.
Business section: Investing ideas
In order to minimize the potential of group think, we wanted to find stocks that have received bullish ratings from more than one respected group of sell-side analysts.
For the following list, we took only the stocks both Barclays and UBS are bullish about.
Do you think these two firms are correct in recommending the stocks listed below?
List sorted by ratings date from UBS. (Click here to access free, interactive tools to analyze these ideas.)
1. FXCM
2. Amdocs: Provides software and services to the communications, media, and entertainment industry service providers worldwide. On 01/28/2011, Barclays Capital had a Overweight rating on the stock. On 01/13/2011, UBS had a Buy rating on the stock.
3. Micron Technology
4. Stanley Black & Decker: Provides hand tools, mechanical access solutions, and electronic security solutions. On 10/13/2011, Barclays Capital had a Overweight rating on the stock. On 02/18/2011, UBS had a Buy rating on the stock.
5. Textron
6. Demand Media: Operates as a content and social media company in the United States. On 09/16/2011, Barclays Capital had a Overweight rating on the stock. On 03/07/2011, UBS had a Buy rating on the stock.
7. Qlik Technologies
8. Baker Hughes
9. HCA: HCA Holdings, offers health care services in the United States. On 04/19/2011, Barclays Capital had a Overweight rating on the stock. On 04/05/2011, UBS had a Buy rating on the stock.
10. Informatica: Provides enterprise data integration and data quality software and services worldwide. On 12/06/2011, Barclays Capital had an Overweight rating on the stock. On 04/29/2011, UBS had a Buy rating on the stock.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above.
