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, investment banks and nominal retail banks alike got 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. After all, we're still relying on 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 one another, 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, the trouble with analyst price targets is:

1. You get no context.

2. The vast majority of stocks -- not surprisingly, for an industry that makes money by convincing 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 is that fully 67% of S&P 500 companies are undervalued -- even after the recent run-up.

Consider these standouts:


Recent Price

Consensus Target Price

Upside Potential

Halliburton (NYSE: HAL)




Merck (NYSE: MRK)




Adobe (Nasdaq: ADBE)




Baker Hughes




Abbott Labs (NYSE: ABT)




While these are well-run 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:

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

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

You can't
That's one of the reasons we created Motley Fool CAPS, a 160,000-member database that ranks investors by how well their stock picks perform relative to the S&P 500. Those whose track record places them in the top 20% are the cream of the crop. We like to call them "All-Stars."

Here are three cheap stocks those expert investors love right now:


All-Star Outperform /
Underperform Ratings

Valero (NYSE: VLO)

1,221 / 25

Berkshire Hathaway (NYSE: BRK-B)

1,752 / 15

Activision Blizzard (NYSE: ATVI)

1,619 / 37

Sources: Birinyi Associates, Motley Fool CAPS, and Capital IQ, a division of Standard & Poor's.
*Based on next 12 months' earnings estimates.

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

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 acquired Vivendi's Blizzard, which augments its existing stable of popular titles such as Call of Duty and Guitar Hero -- the No. 1 and No. 2 console games, respectively -- with World of Warcraft's more than 11 million online subscribers.

Last year's sequel to Call of Duty was a record-breaking success, and Activision is set to release highly anticipated sequels to World of Warcraft and Starcraft this year. In addition, the company announced it plans on buying back up to $1 billion worth of stock, and it will begin paying a dividend. David still thinks Activision's a great stock, and more than 1,500 CAPS experts agree.

While Activision Blizzard has risen by more than 230% for Stock Advisor members, it isn't the only pick that's outperforming. Although the service was launched in the midst of the last bear market, the average Stock Advisor recommendation is nonetheless beating the S&P by 60 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 owns shares of Berkshire. Berkshire, Adobe, and Activision Blizzard are Stock Advisor recommendations. Berkshire is also an Inside Value selection. Motley Fool Options recommends a synthetic long position on Activision. The Fool owns shares of Activision and Berkshire. The Fool is investors writing for investors.