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Published: March 10, 2010
Anyone can get lucky once in a while. The
same goes for the so-called "experts" on Wall Street. But when
the overwhelming majority of experts agree on a handful of
stocks, investors should take notice. When a stock has, say, 20
analysts covering it -- and all 20 think the stock is a strong
'Buy' -- it's pretty clear that big things are expected.
Now, it's easy to go along with the crowd and jump on a stock's
bandwagon in such a scenario. But, buyer beware. This is
precisely the type of circumstance when an investor's
contrarian side should take root. Can an overwhelming
bullish sentiment be a bad thing? You bet.
Naturally, you'd like to see more 'Buy' ratings than 'Sell'
ratings. However, a stock with all 'Buy' ratings might not have
any upside left. It's certainly possible. But for every stock
that sputters after a good run, there are companies like
Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) that
-- just when you think they've run up as much as possible --
will still beat earnings estimates or otherwise harness a new,
long-term
profit catalyst that will grow profits for years to
come. This is the type of stock we're looking for in this week's
Inside the Numbers.
For starters, we wanted to look at stocks with plenty of analyst
coverage. Then, we screened for stocks with a large number of
'Buy' ratings. Based on the contrarian argument we discussed
above, we also needed a way of filtering out stocks that have
likely hit their ceilings and identifying stocks that are
underpriced relative to their potential earnings growth. For
this, we used a simple a simple formula: Price/Earnings to
Growth (PEG). It is calculated by taking a stock's
P/E ratio and
dividing it by its estimated earnings growth. (My colleague
Carla Pasternak gave a terrific explanation of the importance of
PEG in the February issue of
High-Yield Investing.) This allowed
us to find stocks that, despite their overwhelming number of
'Buy' ratings, may still have some long-term upside.
With these points in mind, the StreetAuthority research staff
recently ran a screen for the following criteria:
-- S&P 500 stocks with at least 10 analysts covering the stock
-- 'Buy' recommendations that amounted to at least 80% of total
recommendations
-- PEG of less than 1, signifying that the Street is paying
nothing for earnings growth
We came up with the following results:
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Surprise, surprise -- our friends Apple and Google are on the
list. The results seem to suggest that these stocks, despite
being branded as "growth" stocks, may actually be underpriced.
Comparing Apple's P/E of 20 to its 5-year historical valuation
of 30.5 and Google's P/E of about 27 to its 5-year historical
valuation of about 46.9 would seem to confirm this.
Another interesting name on the list is CVS Caremark (NYSE:
CVS). CVS is the largest drugstore chain in the United States,
with about 7,000 locations. The company purchased Caremark, a
pharmacy benefits manager, in 2007. Shares took a hit in
November 2009 when the pharmacy benefits division announced that
it lost about $3.7 billion in contracts and that margins would
be slimmer going forward. Pharmacy benefit managers use their
size as negotiating power to get cheaper drug prices for
customers and are a key piece of the puzzle in lowering
healthcare costs.
Another
profit catalyst on the horizon is the
coming wave of
drug patent expirations. CVS earns a fee for filling
prescriptions, and more affordable drugs mean more prescriptions
to fill. Not only that, but CVS actually has more bargaining
power with generic drug companies than Big Pharma, so it usually
earns a higher fee for generics than branded drugs. (Side note:
CVS is also a big supporter of biogenerics. More on that
here.)
If CVS can manage to turn around its pharmacy benefits division
and reap the long-term benefits of an increasing amount of
generics on the market, it will go a long way to proving the
experts right on this one.
-- Brad Briggs
Staff Writer
Street
Authority |
