We all want the best in life -- whether it's the best clothes, the best cars, the best houses, or ... the best stocks.
One way to find the best stocks is to look for companies that multiple analysts -- not just one -- have picked to outperform. It's the analysts' job to rate companies based on their fundamentals, outlook, and valuation, so if several analysts have a buy rating on a particular stock, that might just mean it's a winner.
Take offshore oil and gas driller Transocean (NYSE: RIG ) , which has an "outperform" rating from 28 analysts on the Street, or health-care juggernaut Johnson & Johnson (NYSE: JNJ ) , which has get a healthy 30 "outperform" votes. When the stocks' prices are knocked down -- as they are for these -- the time might just be ripe to add them to your portfolio.
Check under the hood of these analyst ratings, and you do indeed find strong companies trading at low multiples. Transocean warrants its favorable valuation -- it sells at a price-to-earnings multiple of 3.6 at around $54 per share, compared with 10 to 11 in April, when the stock sold in the $150-$160 range. The selloff in oil futures has caused the stock to get pummeled, but the company still maintains 90% of its backlog in investment-grade companies. What's more, the CEO noted in the company's third-quarter conference call that a soft labor market, in conjunction with collapsing commodity prices, could quell increases on the cost side of the business.
Johnson & Johnson, meanwhile, continues to post vigorous results despite the adverse effect that generic products are having on the pharmaceutical industry. The company is also making synergstic acquisitions for the long haul -- including its purchase of Mentor, a manufacturer of breast implants. That acquisition should allow its surgical-instrument unit, Ethicon, to augment its presence in aesthetic and reconstructive medicine. J&J sells for a P/E of 13, compared with a pricier 16-17 last August.
Analyst ratings can lead to finding strong investment candidates. So, wouldn't it be great to know which companies Wall Street favors the most? To find some of the Street's favorite companies, I used the screening tool at the "wisdom of crowds" club we call CAPS. I screened using the following criteria:
- Stocks with 10 or more "outperform" ratings from Wall Street analysts.
- Stocks with 1,000 or more "outperform" ratings from members The Motley Fool's CAPS community.
- Stocks with CAPS ratings of five stars, the highest possible. During the first 20 months for which we have data, five-star companies have outperformed the market, with average annualized gains of 12%.
- Stocks with market caps of $5 billion or greater.
Here are some of the companies that showed up:
|
Company
|
No. of Wall Street Analysts With "Outperform" Ratings
|
Outperform Picks in CAPS Community
|
Market Cap (in Billions)
|
|
3M (NYSE: MMM )
|
22
|
3433
|
$38.9
|
|
Activision Blizzard (Nasdaq: ATVI )
|
28
|
2915
|
$13.4
|
|
Applied Materials (Nasdaq: AMAT )
|
25
|
1455
|
$13.8
|
|
Chesapeake Energy
|
24
|
5978
|
$8.8
|
|
EMC (NYSE: EMC )
|
21
|
2853
|
$21.6
|
|
Johnson & Johnson
|
30
|
10125
|
$160.4
|
|
Transocean
|
28
|
4717
|
$17.1
|
|
XTO Energy (NYSE: XTO )
|
22
|
2039
|
$20.5
|
Source: Motley Fool CAPS.
Keep in mind, though, that while analysts understand equities well, you shouldn't purchase stocks based solely on their "buy" recommendations. Instead, make their calls an indicator for further research, to see whether a particular stock is right for your portfolio.
Start searching for Wall Street's favorite stocks at Motley Fool CAPS today! Let the collective wisdom of our 120,000-member-strong (and growing!) investment community help you make better investing decisions.
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