Analysts Were Right In 2018: What Are Their Top Picks For 2019?

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Includes: AMZN, BABA, FANG, MDCO, ONCE, PXD, QURE, WPX
by: The Investment Strategist
Summary

Following up on our article from December 2017, we revisit how analyst rankings panned out and look at which sectors and stocks are most in favor in 2019.

For the most part, stocks with a high degree of analyst buy conviction outperformed those whose forecasts were less optimistic.

For 2019, there are some obvious sector favorites and the bullishness on small caps is interesting.

In late 2017 I published an article based on analyst recommendations and how well those recommendations pan out. The data was based on information compiled by FactSet Research for analyst recommendations as of Dec.31, 2016. The ratings were divided up in quintiles based on the highest percentage of buy ratings for the S&P 500, and, interestingly, the results showed that only the first quintile of ratings - those with the highest percentage of buy ratings – significantly outperformed the others. Besides confirming that analyst recommendations don't amount to much of an indication of how a stock will perform – unless an overwhelming number of analysts are bullish on the stock - we were intrigued by the results and wanted to expand that study to stocks beyond the S&P 500.

We analyzed all stocks for which Ycharts recorded a recommendation, whether it was a buy, sell, or hold. We then ranked the stocks by the number of total buy recommendations and highlighted the percentage of buy recommendations of the total recommendations that each stock had. The article was published on Seeking Alpha back in December 2017.

Naturally, larger-cap stocks would be toward the top of the list because with more coverage, they would also be more likely to have a higher number of buy recommendations. Since we started with more than 5,000 stocks, we only published the Top 100 so the data can be legible online.

The results for the year were surprisingly consistent with Factset's findings from the year before, where stocks with a higher number of buy recommendations and a higher percentage of buy recommendations outperformed those on the opposite end of the spectrum.

Stocks with more than 90% buy recommendations had a return, on average, of -9.4% for 2018. The best performing stocks, however, were those that had 80%-89% buy recommendations with a return of -4.4%. From there, returns fall off a cliff, where stocks with 70%-79% buy recommendations lost 14.4%, those with 60%-69% buy recommendations lost 11.5%, and those with 50%-59% buy recommendations lost 24%.

The results were even more consistent when we looked at the number of buy recommendations. Stocks with more than 40 buy recommendations returned 4% on average, those with 31-39 buy recommendations lost 1.2%, those with 21-29 recommendations lost 12.7%, and those with 11-19 buy recommendations lost 14%.

Source: Prepared by author

If history were to repeat itself and analyst recommendations will again predict the best vs. worst performers, we figured we do the exercise again with current analyst recommendations.

Best Stocks for 2019

This year we expanded our analysis to take a better look at recommendations across sectors and market cap. In general, it seems analysts are most bullish on small-cap stocks with an average percentage of buy ratings of 67%, compared to just 52% in mid caps and 54% in large caps. Of course, the information is somewhat skewed because with less coverage on small caps, we are likely to have a higher percentage of buy recommendations from analysts for the stocks they cover. In other words, many small-cap stocks that get a sell recommendation are likely not followed consistently.

On the other hand, perhaps the optimism for small caps stems from the trade war, strong dollar, or other factors that inhibit the ability for large-cap stocks to increase profits relative to the more domestic focused challenges that small caps face. In any case, we too are more optimistic about smaller cap stocks than we were a year ago.

We see from the chart that small-cap preference is across all sectors except for the energy sector where large caps have 61% buy recommendations compared to just 57% for small caps.

We can also see that the highest percentage of buy recommendations are for small caps in the healthcare sector.

For reference, we have included the top 20 small-cap healthcare stocks by buy recommendations. The top three on the list include Spark Therapeutics (ONCE), The Medicines Company (MDCO), and uniQure N.V. (QURE).

If we look at the number of buy recommendations as a potential predictor of better performers, we see that the highest average Buy Recommendations belong to the energy sector with the average stock having an average of 4.15 buy recommendations. While healthcare and technology are No. 1 and No. 2 for total number of stocks with buy recommendations – a product of both the number of stocks in each sector as well as analyst bullishness of each respective stock – within energy, those stocks have the highest average number of buy recommendations.

For reference we also included the top 20 energy stocks ranked by number of buy recommendations. The top three include Pioneer Natural Resources (PXD), WPX Energy (WPX) and Diamondback Energy (FANG).

The Individual Stocks

Looking at the list of individual stocks in our analysis, we show that Alibaba (BABA) has 38 buy recommendations, which make up 100% of the total analyst recommendations on the stock. That means if it's not a solid performer in 2019, there will be a ton of incorrect analyst recommendations. The consensus price target, if you're wondering, is $204.51 – a 37% increase from the price as of Jan. 15, 2019. Amazon (AMZN) comes in second with 32 buy recommendations and a price target of $2,151, or 33% above the current price.

There are more than 5,000 stocks on the list but we have only included the top 50 for your reference.

Good luck stock picking!

Disclosure: I am/we are long AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It does not provide individualized advice or recommendations for any specific reader. Also note that we may not cover all relevant risks related to the ideas presented in this article. Readers should conduct their own due diligence and carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances.
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