Buy These Stocks Before Wall Street Catches On

Have you ever listened to an interview with a supermodel?

And no, I don't mean watched an interview, I mean listened to one. Almost invariably, the supermodel recalls her awkward years in high school. Occasionally, the years were so awkward she didn't get asked to prom.

It wouldn't have taken a Casanova to score a date with a supermodel back then. Years later, even Casanovas get turned down.

It's this same kind of bad timing that can kill your portfolio's returns.

The supermodel stocks
Since my job is analyzing and writing about stocks, I talk to a lot of people about stocks -- from folks who can barely spell the ticker symbol to folks who have multi-tab spreadsheets on each company they follow. But this motley assortment has one thing in common.

Everybody, and I mean everybody, has an opinion on Apple (Nasdaq: AAPL  ) . And Wal-Mart (NYSE: WMT  ) . And Google (Nasdaq: GOOG  ) . And the other supermodel stocks as well.

The problem is that they're kinda late to the party. Wall Street is all over these companies. Apple has 44 analysts covering it, Wal-Mart has 26 and Google has 38.

To be clear, those analysts cover these companies and their industry competitors as a full-time job -- they're laser-focused on knowing everything they can about just a few companies. While you're making toast in the morning, they're updating proprietary models. When you're meeting with your boss, they're meeting with CEOs. Printing out one of their research reports will get you on the Sierra Club's watchlist.

You get the idea.

Wall Street's weakness
Now, that doesn't mean you can't make money on these stocks. Wall Street is known for following the herd and thinking in quarters instead of years. You can surely exploit these Wall Street weaknesses. Heck, that's what we try to do every day at the Motley Fool.

However, focusing just on the big guys misses Wall Street's biggest blind spot. Analysts are very well compensated, so covering the little guys -- the ones fewer people have heard of -- just doesn't make sense from a cost-benefit perspective.

And that leads to opportunity for the individual investor (read: you).

Just look at the differences in the amount of coverage the following stocks receive:

Small, Underfollowed Stock

No.  of Analysts

Well-known Stock

No.  of Analysts

inVentiv Health

4

United Health (NYSE: UNH  )

22

Ameristar Casinos

12

MGM (NYSE: MGM  )

Las Vegas Sands (NYSE: LVS  )

23

18

Dawson Geophysical

3

ExxonMobil (NYSE: XOM  )

Schlumberger

20

28

Twice as many professional analysts follow the Vegas lights of MGM and Las Vegas Sands than Ameristar, which stays in the shadows by operating in places like St. Louis and Kansas City. It's even more lopsided for Dawson Geophysical and inVentiv Health.

Keep your eyes open
Now, just because a company is underfollowed doesn't mean it's a diamond in the rough just waiting to be discovered. In fact, there are plenty more bad, unfollowed companies than good.

The trick is to do the work that Wall Street either can't or hasn't yet. 

The team at Motley Fool Hidden Gems recommends looking for the following characteristics to separate the gems from the garbage:

  • Strong balance sheets
  • Strong free cash flow
  • Sustainable competitive advantage
  • Smart management that's properly incented

After identifying these companies, the next step is buying in at a good price.

The Hidden Gems team does this for the world to see. They search for the small, ignored stocks that will be tomorrow's supermodel stocks; then, they invest the Motley Fool's own cash in a real-money portfolio. Each month, they identify two new portfolio candidates, but they don't buy shares until the opportunity for returns gets sufficiently juicy. So far, inVentiv Health, Ameristar, and Dawson Geophysical haven't made the cut. To see the companies that have, click here for a free 30-day trial.

Anand Chokkavelu does not own shares in the companies mentioned in this article. He wonders: If your next-door neighbor were a supermodel, would she have supermodel looks or girl-next-door looks? Ameristar Casinos, Dawson Geophysical, and inVentiv Health are Motley Fool Hidden Gems picks. Google is a Rule Breakers recommendation. Apple, UnitedHealth Group, and inVentiv Health are Stock Advisor selections. UnitedHealth Group and Wal-Mart Stores are Inside Value selections. The Fool owns shares of inVentiv Health and Unitedhealth Group and has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (73)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 19, 2009, at 1:17 PM, PeyDaFool wrote:

    "Years later, even Casanovas get turned down."

    Do I detect resentment in your tone?

  • Report this Comment On December 19, 2009, at 2:20 PM, TMFEditorsDesk wrote:

    @PeyDaFool,

    I still haven't gotten over Heidi Klum choosing Seal over me.

    -Anand (TMFBomb)

  • Report this Comment On December 19, 2009, at 2:40 PM, plange01 wrote:

    buying casino stocks in a depression is a great idea!most will wind up as low income housing and prisons...

  • Report this Comment On December 19, 2009, at 11:38 PM, PeyDaFool wrote:

    Hey Anand,

    Seal's a pretty talented dude, but I bet a dozen monkeys throwing darts at random stock tickers could probably top his shoddy average.

    Don't worry, buddy. There are plenty of desirable ladies out there who find a guy with your uncanny stock picking abilities quite attractive.

    As the talented rapper Nasir Jones always says, "You lose money chasin' women, never lose women chasin' money."

  • Report this Comment On December 20, 2009, at 10:27 AM, TMFEditorsDesk wrote:

    @plange01,

    To be clear, I'm not advocating for MGM, WYNN, or ASCA at today's prices. I am keeping an eye on all three in case sentiment drops them to more appetizing prices. At that point, I'd be weighing their ability to navigate a rough economy with leveraged balance sheets vs. their profit-making capabilities in better times.

    @PeyDaFool,

    Thanks for the pick-me-up!

    -Anand (TMFBomb)

  • Report this Comment On December 20, 2009, at 3:36 PM, automaticaev wrote:

    thats what sucks about this websight you guys never talk about any short term plays and speculation is part of investing.

  • Report this Comment On December 20, 2009, at 3:40 PM, TMFEditorsDesk wrote:

    @automaticaev,

    Every strength has a weakness, I guess...one of the reasons I originally read the site, later subscribed to Hidden Gems, and eventually applied to work at the Fool is because of its long-term investing focus.

    - Anand (TMFBomb)

  • Report this Comment On December 23, 2009, at 7:38 PM, Gardnermiles wrote:

    Personally I find stock trends and then ponder and check out stocks I never would have considered if it wasn't for the Motley Fool. I am cautious and hard to convince but found the Gardner's to be very much on track.

  • Report this Comment On December 26, 2009, at 12:00 AM, dacoconutfarm wrote:

    where are my million dollar porfolio stuff and the 10 best stocks for 2010? I already paid for the information

  • Report this Comment On January 01, 2010, at 1:45 PM, automaticaev wrote:

    @tmf editors desk but montley fool has turned out to be 100% incorrect with its long term focus. Buy ire for 80$ a share and then they say sell it for .66 cents? totally wrong and speulating counts as long term too if you dont spend the money u make.

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