Wall Street analysts don't always get their stock picks right, but being able to call up company executives and industry contacts to get a sense of a business's direction at least provides them with educated insight. That's why it is seen as a bullish signal when an analyst upgrades a stock to a buy rating.
Below are three stocks that Wall Street issued strong buy alerts for, suggesting these are analysts' strongest convictions for the future. But we don't want to rely entirely upon analyst sentiment for investment decisions -- so we'll also put the wisdom of crowds to work for our benefit.
The 60,000-member Motley Fool CAPS platform aggregates the opinions of investors by asking them to assign ratings to each stock based on its perceived likelihood of outperforming the market, from one to five stars, with five being the best. Investors are also rated themselves based on how well their stock picks perform, with those who earn higher ratings having more influence on a stock's rating. So if you have a great stock-picking track record on the platform, CAPS gives your opinion more weight.
Here's what investors on the platform had to say about some of Wall Street's top picks.
Lumentum Holdings (CAPS Rating: 4-stars)
Lumentum Holdings (LITE -4.79%) engaged in a bidding war to try and acquire Coherent (COHR), which had investors concerned it was going to overpay for the laser maker. The original $5.7 billion bid quickly escalated to $7 billion, but Lumentum ended up bowing out and allowing II-VI to win the contest.
Raymond James analyst Simon Leopold was struck by the optical and photonics company's willingness to walk away from what could have turned into an expensive transaction. In a note to clients, Leopold said, "We liked, but did not love, the deal when it was first announced, but the bidding war ended at an elevated valuation for Coherent." He saw Lumentum's decision to not pursue a deal at any cost as a sign of management's "discipline in selecting its battles."
The client note was titled, "Lumentum walks, we run to strong buy rating." It said that the stock, which was down 27% at the time from recent highs, was at an attractive entry point. He has a price target of $112 per share, which -- even including the boost shares got from the ratings upgrade -- still represents 20% upside.
CAPS players also like Lumentum's chances of beating the market in the coming years, with 96% of those weighing in saying the opportunities in 5G, LiDAR, and 3D sensing are too good to pass on. Those were also the reasons I predicted Lumentum would outperform back in 2019, and have been rewarded with a 75% gain since then, compared to a 43% rise in the S&P 500.
SolarEdge Technologies (CAPS Rating: 4-stars)
SolarEdge Technologies (SEDG 1.20%), the market leader in optimized inverter solutions for residential, commercial, and small utility-scale customers, was given a helping hand by Barclays analyst Moses Sutton, who upgraded his outlook on the stock from "equal weight" to "overweight". He said the solar stock was his new best pick in the solar space because the rest of Wall Street was missing the opportunity. Sutton said the consensus estimate for the extra profits SolarEdge's Kokam lithium battery subsidiary would juice out of the company's Energy Hub inverter business was too low.
As my colleague Rich Smith points out, SolarEdge has seen sales more than double over each of the last three years -- and with analysts forecasting earnings to grow 25% annually for the coming five years, its stock, which is down 25% from recent highs, could appear discounted.
Yet Smith also notes that across several metrics, including its price to free cash flow, it seems anything but cheap. CAPS player jfdihansen appears to agree, saying the stock's "P/E is way too high even considering estimates for future growth. Waiting for more of a pullback before buying. Definitely a good company in the longer term but it will be 'dead money' for some time."
Even so, 97% of the CAPS players have predicted SolarEdge will outperform the S&P 500 over the next five years, with over 98% of the All-Stars, or the top CAPS players, agreeing.
ViaSat (CAPS Rating: 2-stars)
Satellite internet provider ViaSat (VSAT -2.48%) is one area where Wall Street and CAPS seem to diverge sharply. Where Raymond James analyst Ric Prentiss upgraded the stock to a strong buy from outperform, the CAPS community just downgraded ViaSat from three stars to two.
After a big run-up in the stock price in January that saw shares almost double in value in about six weeks, they've tailed off since then and are now down 22% from their peak. The stock benefited from short-sellers covering their positions after all-star money manager Cathie Wood announced the creation of a new exchange-traded fund, ARK Space Exploration & Innovation (ARKX -0.81%), to take advantage of exciting opportunities in the sector.
Wood told CNBC's ETF Edge that satellite internet and hypersonic travel were among the "big ideas" she was targeting as costs came down. That had investors speculating that ViaSat would be one of the stocks she would be buying, much like the Procure Space ETF, which counts ViaSat as one of its top five holdings. Wood's ETF, however, does not hold any ViaSat stock.
However, another smart investor, Seth Klarman of Baupost Group, is ViaSat's largest shareholder, owning nearly 25% of the satellite company's outstanding shares.
The CAPS outlook is much more muted. Fool investors might be waiting on the company to finally prove its potential, as the stock has underperformed the broad market index over every period for the past decade.