It took a special kind of incompetence to get to where we are today. After years of "producing" billions of dollars using sophisticated financial instruments, we saw investment banks and nominal retail banks alike get crushed by the consequences of excessive leverage and convoluted investments.

Good thing we've stopped trusting our finances to what those bozos have to say.

Yeah, good thing
Then again, maybe we haven't completely. Case in point: analyst forecasts.

It's a well-documented fact that analyst earnings estimates tend to be wildly inaccurate -- off by some 40% on average, according to an extensive study by two Penn State professors. Then there's the herd mentality that figures into buy and sell recommendations.

In his book One Up on Wall Street, legendary former Fidelity Magellan fund manager Peter Lynch explains why so many Wall Street analysts copy each other, rather than risk their reputations on unusual opinions: "Success is one thing, but it's more important not to look bad if you fail."

See, as my colleagues Brian Richards and Tim Hanson revealed in a recent column, the trouble with analyst price targets is:

  • You get no context.
  • The vast majority of stocks -- not surprisingly, for an industry that makes money by persuading you to buy stocks -- are considered "undervalued."

Really? The vast majority?
Yes. According to data I've collected using Capital IQ, an institutional software package, the Wall Street consensus considers fully 69% of S&P 500 companies to be undervalued even after the recent run-up.

Consider these standouts:


Recent Price

Consensus Target Price

Upside Potential









Wal-Mart (NYSE:WMT)








McDonald's (NYSE:MCD)




While many of these are excellent companies, and it may be comforting for us to see lofty analyst price targets attached to our stocks, it's absurd to think that the vast majority of the S&P 500 -- an index that captures the most carefully scrutinized publicly traded companies -- would be undervalued.

Remember, many of these recommendations come from the same Wall Street firms that couldn't properly analyze their own businesses. And while that doesn't mean none of them employs very capable analysts or that no stocks are undervalued today (many are), it does raise another problem with price targets:

  •  You have no way of assessing the analyst's past record.

If all you have to go on is that someone at UBS likes AT&T, how on earth are you supposed to estimate the quality of the analysis, much less decide whether you agree with the opinion?

You can't
That's one of the reasons why we created Motley Fool CAPS, a 135,000-member database that ranks investors by how well their stock picks perform relative to the S&P 500. Those whose track records place them in the top 20th percentile are the cream of the crop. We like to call them "All-Stars."

Here are three stocks those expert investors love right now, each with a below-market-average price-to-earnings multiple:


All-Star Outperform / Underperform Ratings

Price-to-Earnings Multiple


771 / 27


PepsiCo (NYSE:PEP)

1,132 / 21


Activision Blizzard

1,329 / 28


 Source: Motley Fool CAPS and Yahoo! Finance.

Today, I'd like to give you more information about one of these names -- Activision.

As Fool co-founder David Gardner wrote for Motley Fool Stock Advisor members in 2002, "the Tony Hawk series of extreme skateboarding games ... [has] been a huge hit. The series has opened the way for other extreme sports action games, giving Activision a strong niche presence [that] has created nice sustainable profitability."

On the strength of its games' popularity, Activision grew earnings from $52 million to some $230 million over the next five years. The company recently acquired Vivendi's Blizzard, which augments its existing stable of Call of Duty and Guitar Hero -- the No. 1 and No. 2 console games, respectively -- with World of Warcraft's 11 million online subscribers.

David wrote again last fall, "Hot new releases in the top-selling Guitar Hero franchise will strike a chord with shoppers this holiday season, while new titles, additional revenue opportunities, merger boons, and Blizzard's superior margins will set the newly combined company on the path to a fast-swelling bottom line." David still thinks Activision's a great stock, and more than 1,000 CAPS experts agree.

While Activision is up more than 200% for Stock Advisor members, it isn't the only pick that's outperforming. Despite launching the service in the midst of the last bear market, the average Stock Advisor recommendation is beating the S&P by more than 40 percentage points.

If you're looking for some more stock ideas, click here to see Fool co-founders David and Tom Gardner's favorite stock right now, free for the next 30 days. There's no obligation to subscribe.

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This article was originally published May 26, 2009. It has been updated.

Ilan Moscovitz doesn't own shares of any company mentioned. Akami is a Motley Fool Rule Breakers recommendation. Wal-Mart is an Inside Value selection. PepsiCo is an Income Investor pick. Activision is a Stock Advisor selection. The Fool owns shares of XTO and has a disclosure policy.