As Sam Sees It: What to Do With Overrated Stocks?

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.

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EQ: What are your thoughts on September’s impressive performance thus far in the first half of the month?

Stovall: I don’t think it’s that big of a surprise because August was a very bad performer. While typically August is relatively weak, this time it was down about 3 percent. So we’re really just getting back to where we were. In fact, we still need another 25 points or so in order to get back to the all-time high of 1709. I think we have to wait to see what happens with the second half of the month before we say that September’s performance was a-typical.

We still have the Fed, which still needs to have its upcoming FOMC meeting, as well as Congress deciding on the budget deficit, the continuing resolution, and raising the debt ceiling. So there are still a lot of hurdles we have to face.

EQ: In this week’s Sector Watch, you discussed that S&P Capital IQ believes the Fed could actually implement smaller drawbacks of the bond purchasing program, with interesting descriptions such as Taper Tots. Does this indicate that the Fed actually has a larger array of exit strategies than the market has accounted for?

Stovall: Maybe it doesn’t have a larger array, but it certainly does indicate that it can be very flexible in the timing and the amount of tapering that takes place. Also, who’s to say that they can’t reverse the tapering and start stimulating once again? They have said time and time again that everything is data dependent. How strong or weak the U.S. economy is will dictate the timing and the magnitude of the tapering.

EQ: You also gauged the opinion of Wall Street analysts on the market right now and it seems like the consensus is to take a wait-and-see approach with regards to the various uncertainties going on. What else did you find?

Stovall: Brokershave always been regarded as cheerleaders forWall Street in general, and you can sort of see that in the consensus buy, hold, and sell recommendations of the stocks in the S&P 500. The unweighted average—on a scale where “5” means a buy and “1” is a sell—is 3.7 for all of the stocks in the S&P 500. The lowest ranking is a number of 3.4 for Utilities, and the highest is 3.9 for Energy.

What I tried to do is compare that with the S&P Capital IQ’s equity analyst recommendations. For the market as a whole, we ended up with a smaller number of 3.4, but with a wider range of 2.8 for Materials and 4.0 for Telecom.

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Then I took out all the hold recommendations and looked at only the companies with real buy or sell opinions. It ended up skewing both numbers a little higher, but keeping a fairly tight consensus range for all of Wall Street analysts. For S&P’s equity analyst ratings, however, the range actually widened.

What it basically shows is Wall Street, on the whole, is probably either going to rank stocks favorably when they like them, or if they don’t like them, they’re basically going to call them a hold and hide out among the masses. For S&P Capital IQ, because we have no brokerage arm or corporate finance activities, we’re very willing to call something a sell if we think it’s worth unloading.

EQ: There were 19 stocks that had a wide difference between the opinion of S&P Capital IQ’s equity analysts versus that over other Wall Street firms. How would you recommend investors approach polarizing stocks such as these?

Stovall: When you think about it, Apple has 57 Wall Street analysts analyzing that one stock. Cisco and Intel are other stocks that have more than 40 analysts covering them. In a sense, which stones have not been unturned for these very largely followed issues?

If everybody likes a stock, who’s left to push it up further? So it could end up being a good contrary indicator. What I did was look for stocks with a very wide difference between the S&P ranking and the consensus Wall Street ranking. Not surprisingly, it came from stocks that had buy recommendations on Wall Street but sell recommendations from Capital IQ.

I would advise to never take anybody’s recommendation with blind faith, and certainly not without doing your own research. Also, there could be some outliers in that there are some stocks that don’t deserve to be called a hold or a buy because there could be some fundamental problems. So I presented a relatively small list in my latest report that investors could look at on their own to see whether they agree with S&P’s analysts and use them as reasons to sell or if they feel they agree with Wall Street’s general opinion on those stocks and stick with them.

Here are a few names that had buy ratings from Wall Street and sell ratings from S&P Capital IQ:

  • Intuitive Surgical (ISRG) at $385
  • Xerox Corporation (XRX) at $10
  • Allegheny Technologies (ATI) at $28
  • Home Depot (HD) at $73
  • Eaton Corp (ETN) at $66
  • Range Resources Corp. (RRC) at $77

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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