|
Published: February 17, 2010
When I was an analyst at the uber-contrarian
Avalon Research Group, we only initiated coverage on a stock if
our opinion went against the consensus, or if the security was
barely (or not at all) followed by Wall Street.
For this column, I'm going to focus on the latter -- and show
you how this seemingly unconventional investment strategy can
actually make you a lot of money.
If you want quantifiable proof, consider this nice bit of
research from Cem Demiroglu at Koc University in Turkey, and
Michael Ryngaert at the University of Florida: In 2008, they
conducted a study that showed that stocks without any analyst
coverage experienced a 4.82% higher return than their peers
after coverage initiation.
The lesson here is simple.
Invest Ahead of the Wall Street Herd
Owning stocks that Wall Street doesn't follow is usually a
sure-fire way of getting in before the crowds.
Stocks that lack Wall Street's sponsorship in the form of
analyst coverage are known as "orphan stocks." And there's a big
advantage to owning these orphan shares.
When you buy stocks before analysts cover
them, there usually aren't many institutional owners. But once
firms like Goldman Sachs and Morgan Stanley start recommending
them to their hedge- and mutual-fund clients, it often triggers
new and heavy demand for the shares.
Plus, just having a new "Buy" rating flash across the news
ticker can often be enough to move a stock higher all by itself.
When talking about neglected stocks, Greg Forsythe, senior vice
president of Equity Model Development for Charles Schwab,
explained it the best when he said: "Explorers seeking new lands
don't look where others have already been."
Two China Stocks Wall Street Has Yet to Discover
So let's explore some stock territory that Wall Street hasn't
yet discovered...
- Telestone Technologies Corp. (Nasdaq: TSTC): Based in Beijing,
this mobile-telecom-equipment provider hasn't attracted the
attention of any Wall Street analysts so far. However, analysts
are likely to zero in on the stock's Price/Earnings (P/E) ratio
of 14 and healthy balance sheet, and will initiate coverage
after that. The company's fourth-quarter revenue should be very
strong. Its current forecast is for $70 million in sales for the
full year, double the total from 2008. If it's able to achieve
that $70 million target, you could see earnings pop and the P/E
drop to 12.
- QKL Stores Inc. (Nasdaq: QKLS): Staying with our China thesis,
we turn to supermarket player QKL Stores. Only one analyst -- at
Roth Capital Partners LLC -- follows the firm. And he currently
has a "Buy" rating on the stock, which is currently trading at
15 times earnings. If Roth's earnings-per-share (EPS) estimate
of 45 cents per share for 2010 is correct (a 28% jump from
expected 2009 earnings), the stock would trade at just 13 times
its forward earnings. It also trades at less than six times its
trailing 12 months' cash flow. QKL has no debt. Once other
analysts start looking for profitable businesses in China, and
see how cheap this stock is, you'll likely see more jump on the
bandwagon. And that should lift the share price higher.
Where the Heck is Solon?
Here's another neglected stock for your consideration...- Agilysys Inc. (Nasdaq: AGYS): Wall Street obviously missed the
exit for Solon, Ohio. Just two analysts cover
information-technology player, Agilysys. Perhaps the company's
projected EPS of only nine cents for fiscal 2010 (which ends in
March) deters them. But it's no surprise that Agilysys got hit
hard during the economic downturn. Hospitality companies and
retailers cut back their IT spending in a big way. Despite the
sour economy, however, the company was able to generate a ton of
cash -- $81 million in cash flow from operations over the past 12
months, to be exact. That makes the stock very inexpensive, at
just 2.6 times cash flow. And despite weak earnings in fiscal
2010, the firm's per-share earnings are expected to climb -- all
the way to 83 cents in fiscal 2011. According to the two
analysts that cover the stock, earnings are projected to grow at
an average annual clip of 15% over the next five years. So if
things improve in 2010, Agilysys could be a cash-generating
machine. Those kinds of numbers will make it tough to ignore
this stock.
Investing in Wall Street's Stock Oversights
To get in while the gettin's good, you often need to buy stocks
before you hear about them from analysts. As a quick guide, look
for companies that have healthy balance sheets, trade at
reasonable valuations, and aren't receiving much attention from
Wall Street.
Follow this formula and you're likely to outperform many of
those Wharton MBA types who crunch numbers into their
spreadsheets for 15 hours a day, trying to figure out what Apple's revenue will be. View their neglect as
your call to action -- and use it to your advantage.
-- Marc Lichtenfeld
Guest Contributor
Money Morning |
