Contrarian Indicator: Analyst Buy Ratings

We recently gathered the amount of buy and sell ratings that analysts have on each stock in the Russell 1,000 to see which ones analysts are currently the most bullish or bearish on. We treat consensus analyst recommendations as a contrarian indicator. When a stock has a high percentage of buy ratings, it makes it harder for analysts to get more bullish on the stock, hence the next direction in ratings is down. Conversely, when a stock has a low percentage of buy ratings, things can't get much worse, and the upside is much larger.

There are many stocks that are down significantly this year that still have a high percentage of buy ratings. The poor stock performance means analysts will most likely begin to get more negative in their recommendations.

In the first table below, we highlight stocks in the Russell 1,000 that have more than 85% buy recommendations and are down more than 7% year to date. The assumption is that analysts need to lower ratings on these stocks, causing them to go down even more in the short-term. As shown, AAPL and GOOG are at the top of the list. Both of these stocks are down significantly this year, but analysts have not lowered ratings yet. There are four stocks on the list that have 100% buy ratings, yet they are down more than 10% this year. These are TXT, FWLT, WBC and LII.

click to enlarge

On the opposite side of the equation are stocks that have a low percentage of buy ratings yet are up year to date. The assumption here is that analysts will become more bullish on these stocks because they have held up so well in the current market environment. Below we highlight stocks with less than 20% buy ratings that are up on the year.

Comments

[dan clue:]

Etrade is looking for a buyer and will be sold within the next month. I suspect it may very well be Abu Dhabi. Layton can't say that several offers aren't being considered by the board at this time because they are. Also he can't say Etrade has been in talks over the last week but something happened to the deal. I found out that Layton needed to say what he said to CNBC. He did this for one simple reason he needs to keep Etrade's share price low. Typically a buyout company will pay 65% over market close. If this is the case Etrade will be sold for a $6-$6.50 value. This makes it more attractive. I have repeatedly asked Etrade investment line through emails but they still haven't responded to any of my questions.. I have sent almost 10 emails in the last month. Etrade should be reporting out Feb results within days. I'm convinced this will help the share price.

2008 Mar 05 03:22 PM

[SoNgOsOrOnGo:]

It is funny how all those buy are doing bad in the fist chart. Conclusion do not listen to the analyst do your own homework

2008 Mar 05 03:58 PM

[wall street...:]

This is the most ass backward way of stock analysis I have ever seen.

Basically it says to discount an analyst opinion and just trade on momentum.

Seeking Alpha should be avoided.

2008 Mar 05 04:00 PM

[cachaca:]

hey... "wall street guy"...get a grip

This is not a recommendation, just a small "science project".

They made a thesis and backed it up with data.

"SoRoNgO" had it right...do your homework.

As a side note, Cramer likes to say that analyst ratings are the best contrarian indicator for him.

2008 Mar 05 04:12 PM

[DrMark27:]

I'd like to see the % buys vs. sells as of Jan 1, 2008. As the stocks fall (rise), upgrades (downgrades) due to valuation may result. This is a potential confounding variable.

2008 Mar 05 04:22 PM

[jcrash:]

Bah, you take the average of ALL of those on the bottom, and place it against the performance of AAPL over the next 12 to 24 months. It will be a stark contrast.

Let's see
Choicepoint has a P/E of 53.6
BEAS is at P/E of 25 based on 2010 earnings!
E*Trade? Toxic...High risk reward obviously.
Circuit City? Please, no one goes there anymore.

Or you can have AAPL with a P/E of 25, and $25 per share cash growing sales at a phenomenal rate with margins that are still increasing due to component oversupply. I don't own much, but I'd own my little piece well before any of those others.

2008 Mar 05 04:28 PM

[Socialism c...:]

Geez. This is meaningless. Reasons for the analyst ratings are not taken into account. The most obvious reason why following this piece could blow up on you is that for stocks way up on the year, the reason for an analyst saying "sell" could be that they feel it is overbought! And on the other end, they could feel that for those way down on the year, they are a "buy" because they are oversold! C'mon...these "contrarian" charts are overly simplistic! Anyone who goes by these will get slaughtered!

2008 Mar 05 04:51 PM

[wallywonka:]

This is the most asinine report that I have heard to date considering the condition of the market. Do you think possibly that BUY ratings are still up on some of these stocks due to quality management, cash balances, earnings and other stupid little fundamentals? Like...everybody jump into KB Homes because the analysts don't have a buy rating on this stock! If you wait long till 2009, they may start selling homes again if they don't go bankrupt first. Where do you guys come up with this stuff? You are all loosing credibility very quickly!

2008 Mar 05 07:34 PM

[TA:]

This has been common knowledge for years - if everyone likes the stock, who's left to buy. Great strategy.

2008 Mar 05 08:27 PM

[BOB BABIAR:]

In Las vegas I hold at 16, and in the market this year I hold my breath.
When a stock drops 10% in a short period of time the analyists drop there rating.How smart is that,maybe now it's a buy.Just like vegas.

2008 Mar 05 09:46 PM

[Winston Kotzan:]

How creative... just when I thought people ran out of ideas to loose money faster.

2008 Mar 06 02:21 AM

[mosteele:]

This article is interesting. It may well work on the short term.

But I find more interesting the reactions this article causes.

2008 Mar 06 03:23 AM

[redponydoc:]

...I sold out of my position in ETRADE in late '07 at a loss, because all the experts told me to. On 1-7-08, the stock traded at $2.07, and everyone including Jim Cramer ("I'd rather have a $2 lottery ticket than a share of ETRADE"), the CNBC resident geniuses ("Run from this stock as fast as you can!") . If you had done the opposite of what they told you to do, and put every penny you could beg, borrow, or steal into ETRADE on that very day, you could have sold it roughly 6 weeks later at $5.25, a 254% profit.
That is an annualized profit of 2,209%. I haven't seen any of the stocks Jim Cramer or the other experts recommend to their followers reap 2,200% annual gain for them. I suspect there were none.
Point is, my limited experience in the market suggests to me that the contrarian approach is at least as good as following the analysts' advice. An even better would be to totally ignore them.

2008 Mar 06 06:35 AM

[daffy:]

To all you naysayers . . .

If the pundits and analyst had their say about the direction of the economy and the media propaganda, T-rexes would be roaming the earth will-nilly and what humans that were left would be scampering around with limbs bleeding due to fear alone.

Lighten up a bit, and you might make some money. This piece may be a far cry from the more positive recovery spins I would like to see coming out of the pundits and analsyts (has anyone ever noticed the presence of anal in analyst?). All I see is "the sky is falling, you are going to die". I am bored. At least this piece was humorous and gave me a break.

I even bought ETFC at $3.14. Right when everyone was screaming sell. Oh well, I guess I made the wrong decision there. I don't think they sell $3.14 lottery tickets, do they?

2008 Mar 06 07:47 AM

[carolina cr...:]

It's fun to daytrade with Etrade. It's also fun to watch Cramer go ballist and make crazy statements like the $2.00 lottery ticket. Etrade has a lot of loyal clients, me included, because of the great trading platform. And it's also fun to read about such assinine strategies like the one in your column. I wonder if you invest the same way you write.

2008 Mar 06 09:56 AM

[Healthy:]

This report is ridiculous. By the same methodology, they would have bought the losers on the way down, and at much higher prices than where they eventually bottommed out.

2008 Mar 25 12:34 PM

[nyka:]

Try "Low NUMBER of buy ratings," not low amount. Check Webster's Dictionary to learn how to differentiate amount from number.

2008 Apr 01 04:45 PM