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 92% of S&P 500 companies are undervalued -- even after the recent run-up.

Consider these standouts:


Recent Price

Consensus Target Price

Upside Potential

Visa (NYSE: V)




Huntington Bancshares (Nasdaq: HBAN)




Boeing (NYSE: BA)




Republic Services (NYSE: RSG)




JDS Uniphase (Nasdaq: JDSU)




Yes, there's a bull case to be made for each of these companies -- be it anti-competitive dynamics in the credit card duopoly, a steep yield curve, upcoming-787 shipments, strong cash generation, and improving market share, respectively.

But frankly, 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 "buy" 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 Credit Suisse says you should buy Visa, 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 170,000-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

Johnson & Johnson

3,156 / 51

Arcelor Mittal (NYSE: MT)

516 / 4

Activision Blizzard (Nasdaq: ATVI)

1,877 / 33

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 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 augmented its existing stable of popular titles such as Call of Duty and Guitar Hero -- 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 released the highly anticipated sequel to Starcraft this year. Sequels to World of Warcraft and Diablo are in the works. David still thinks Activision's a great stock, and more than 1,800 CAPS experts agree.

If you're looking for more stock ideas, enter your email address in the box below to receive our new free report, "Motley Fool Top Picks and Perspectives 2011." You'll also hear about our Million Dollar Portfolio service, which features best-of-breed stock picks from the Fool's advisory services. Simply enter your email address in the box below to get started.

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

Ilan Moscovitz doesn't own shares of any companies mentioned. Activision Blizzard is a Motley Fool Stock Advisor recommendation. Johnson & Johnson and Republic Services are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a synthetic long position on Activision Blizzard and a diagonal call position on Johnson & Johnson. The Fool owns shares of Activision Blizzard and Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.