An investment research veteran with 20 years of experience names 10 top contrarian stock picks that could see higher earnings ahead despite lower analyst expectations
- Sam Burns is the founder of Mill Street Research, an independent investment research firm.
- Burns discovered ten stocks with low average analyst recommendations but rising earnings estimates.
- The gap between Wall Street recommendations and expectations may present an opportunity.
Swimming against the tide is difficult, but it can be profitable.
Wall Street has been pleasantly surprised by the results as earnings season continues. In a November 1 note to clients, Julian Emanuel, the head of equity, derivatives, and quantitative strategy at Evercore ISI, stated that “to date, 289 S&P 500 companies have reported 3Q results.” Reported sales growth was +1.9% and earnings growth was +3.4%, which surprised by +0.7% and +7.5%, respectively, putting overall sales growth at +2.0% and earnings growth at +2.8%.”
With earnings rising faster than expected, you’d be forgiven for thinking that simply buying whatever stocks analysts recommend is the simplest way to profit.
However, analysts do not always put their money where their mouth is. Sometimes the pros will be bearish on a stock while raising their earnings estimates for the same company.
Taking advantage of the difference between what Wall Street predicts and where earnings are expected to go can be a profitable trading strategy.
Ask Sam Burns, the founder and chief strategist of Mill Street Research, an independent investment research firm aimed at institutional investors. He keeps track of the stocks that have more “sell” and “hold” recommendations from analysts than “buy” recommendations, and he looks for any that have had their earnings estimates raised by Wall Street.
“The idea behind the screen is simply to find stocks where what analysts (as a group) are saying with their recommendations does not align well with what they are doing with their forward EPS estimates,” Burns wrote in a note to clients earlier this month.
Burns averages analyst recommendations into a simple score based on a points system: a “buy” recommendation receives one point, a “hold” recommendation receives two points, and a “sell” recommendation receives three points, while overweight and underweight recommendations receive 1.5 and 2.5 points, respectively.
“To be included in the initial screen, a stock must have an average recommendation score of 1.85 or higher, which represents approximately one standard deviation from the mean recommendation score (the mean is slightly above 1.5),” Burns wrote in a blog post. “A stock must also have positive revisions breadth, meaning more analysts raising EPS estimates than lowering them.”
The stocks will then be run through Burns’ proprietary Monitor of Analysts’ Earnings Revisions model. MAER searches for stocks based on a number of criteria, such as estimate revision trends, price momentum, and absolute and relative valuation.
As a result, there is a list of strong stock picks with low analyst expectations and rising EPS estimates, providing investors with stocks that may not get the love they deserve from Wall Street.
“These screens may thus be appealing to contrarian investors who prefer to find out-of-favor stocks where analysts are relatively negative in their recommendations but may be nonetheless seeing evidence of improving fundamentals,” Burns wrote in a blog post. “Such stocks may thus not have fully reflected the better fundamentals and may benefit if analysts subsequently raise their recommendations.”
The following are the ten stocks that meet Burns’ criteria. Each stock is listed with its ticker, market cap, last closing price, rank in Burns’ MAER system, average recommendation from Wall Street pros, and number of analyst recommendations.
1. PACCAR
Ticker: PCAR
Market Cap: $43.65 billion
Last Closing Price: $82.53
MAER Ranking Percentile: 99.6
Average Recommendation: 1.88
Number of Recommendations: 20
Source: Mill Street Research
2. 3M Company
Ticker: MMM
Market Cap: $49.37 billion
Last Closing Price: $90.93
MAER Ranking Percentile: 97.8
Average Recommendation: 2.08
Number of Recommendations: 19
Source: Mill Street Research
3. Molson Coors Beverage Company
Ticker: TAP
Market Cap: $12.31 billion
Last Closing Price: $57.77
MAER Ranking Percentile: 97
Average Recommendation: 1.88
Number of Recommendations: 20
Source: Mill Street Research
4. DaVita
Ticker: DVA
Market Cap: $6.99 billion
Last Closing Price: $77.23
MAER Ranking Percentile: 96.7
Average Recommendation: 1.89
Number of Recommendations: 9
Source: Mill Street Research
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5. VMware Inc. Class A
Ticker: VMW
Market Cap: $63.22 billion
Last Closing Price: $142.39
MAER Ranking Percentile: 95.3
Average Recommendation: 1.96
Number of Recommendations: 12
Source: Mill Street Research
6. Brighthouse Financial
Ticker: BHF
Market Cap: $2.94 billion
Last Closing Price: $45.30
MAER Ranking Percentile: 95.1
Average Recommendation: 2.18
Number of Recommendations: 11
Source: Mill Street Research
7. Western Union Company
Ticker: WU
Market Cap: $3.99 billion
Last Closing Price: $11.30
MAER Ranking Percentile: 92.8
Average Recommendation: 2.22
Number of Recommendations: 20
Source: Mill Street Research
8. Williams-Sonoma
Ticker: WSM
Market Cap: $9.49 billion
Last Closing Price: $150.22
MAER Ranking Percentile: 92.2
Average Recommendation: 2.02
Number of Recommendations: 25
Source: Mill Street Research
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9. Avnet
Ticker: AVT
Market Cap: $4.18 billion
Last Closing Price: $46.33
MAER Ranking Percentile: 90.6
Average Recommendation: 2.22
Number of Recommendations: 9
Source: Mill Street Research
10. Affirm Holdings, Inc.
Ticker: AFRM
Market Cap: $5.14 billion
Last Closing Price: $17.61
MAER Ranking Percentile: 89
Average Recommendation: 2.08
Number of Recommendations: 18
Source: Mill Street Research
