Looking for ideas on how to find stocks poised to outperform? One source is the sell-side ratings from various banks and firms, usually phrased positively as "buy" or "overweight."
Sell side analysts produce research that is given to brokerage clients for their investment considerations. If the research is from a reliable analyst, a positive report can give a big boost to a stock's share price.
Researchers often cover a specific industry or sub-sector in order to become experts in their field. Their advanced knowledge helps them to utilize complex forecast models and ultimately deliver recommendations on stocks or other securities.
The recommendations are typically phrased as "buy," "sell," or "hold." Some companies issue an "overweight," "underweight," or "hold" rating.
Undervalued to target price
Analyst ratings may not be enough information to help an investor decide to buy into a company. To start with, most investors want to know they are getting a good deal on the share price, and they hope they can buy in while the share price is undervalued to a fair price. This, of course, is more easily said than done.
One option for finding a proxy for fair value, is to consider the mean analyst target price. This is the price that analysts believe the stock will move to within the next year. Therefore, stocks trading at significant discounts to their target prices may be undervalued.
However, because target price tends to be inflated due to analyst optimism, try using the lowest (most pessimistic) analyst target prices, and only of companies with sufficient analyst coverage of at least five ratings.
Business section: Investing ideas
Combining the two ideas mentioned above, we created a list of the stocks Barclays is feeling very bullish about (overweight ratings). From there, we screened for companies that are trading at the most significant discounts to even their most pessimistic (lowest) target prices.
Do you think Barclays is correct to feel optimistic about these names? Do you think the market is undervaluing these names? Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Resolute Energy: Engages in the acquisition, exploration, exploitation, and development of oil and gas properties primarily in onshore properties in the United States. Of the 6 analysts that cover the stock, the lowest target price stands at 14, which implies an upside of 23.02% from current levels around 11.38. On 05/02/2011, Barclays Capital had a Overweight rating on the stock.
2. Ceragon Networks
3. ZIOPHARM Oncology
4. CONSOL Energy
6. Express: Operates specialty retail stores in the United States. Of the 11 analysts that cover the stock, the lowest target price stands at 25, which implies an upside of 16.23% from current levels around 21.51. On 04/12/2011, Barclays Capital had a Overweight rating on the stock.
7. Ariba: Provides collaborative business commerce solutions for buying and selling goods and services. Of the 11 analysts that cover the stock, the lowest target price stands at 33, which implies an upside of 15.79% from current levels around 28.5. On 12/06/2011, Barclays Capital had a Overweight rating on the stock.
8. Vanguard Natural Resources
9. CEVA: With its subsidiaries engage in designing and licensing silicon intellectual property (SIP) for the handsets, portable multimedia, and consumer electronics markets. Of the 10 analysts that cover the stock, the lowest target price stands at 32, which implies an upside of 15.44% from current levels around 27.72. On 04/13/2011, Barclays Capital had a Overweight rating on the stock.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Ratings data sourced from Yahoo! Finance.
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