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Wall Street’s Stock Oversights: How to Profit With This Unconventional Investment Strategy
by Marc Lichtenfeld, Advisory Panelist
Wednesday, February 3, 2010: Issue #1189
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 it 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.
How?
Well, consider this from Cem Demiroglu at Koc University in Turkey, and Michael Ryngaert at the University of Florida: In 2008, they conducted a study which 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 Before Before Wall Street and the Herd
Owning stocks that Wall Street doesn’t follow is usually a sure-fire way of getting in before the crowds.
When you buy stocks before analysts cover them, there usually aren’t many institutional owners. But once firms like Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) 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, puts it best: “Explorers seeking new lands don’t look where others have already been.”
Two Chinese Stocks That Wall Street Hasn’t Discovered Yet
So let’s explore some stock territory that Wall Street hasn’t yet discovered…
- Telestone Technologies (Nasdaq: TSTC): Based in Beijing, this mobile telecom equipment provider hasn’t attracted the attention of any Wall Street analysts so far. However, once they pick up coverage, they’re likely to appreciate the stock’s P/E ratio of 14 and healthy balance sheet. The company’s fourth quarter revenues should be very strong. Its current forecast is for $70 million in sales for the full year, double the figure 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 in China, just one analyst at Roth Capital covers supermarket firm, QKL. He currently has a “Buy” rating on the stock, with shares currently trading at 15 times earnings. If Roth’s earnings per share estimate of $0.45 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. Moreover, 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.
Wall Street Has No Idea Where Solon Is
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 company, Agilysys. Perhaps the company’s projected earnings per share of only $0.09 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, though, 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, EPS is expected to climb to $0.83 in fiscal 2011. According to the two analysts that cover the stock, earnings are projected to grow 15% annually over the next five years, too. So if things improve in 2010, it could be a cash-generating machine. Those kinds of numbers will make it a hard stock to ignore.
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.
You’ll likely outperform many of those Wharton MBA types who crunch numbers into their spreadsheets for 15 hours a day, trying to figure what out Apple’s (Nasdaq: AAPL) revenue will be. View their neglect as your call to action – and use it to your advantage.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
Editor’s Note: To keep tabs on all Marc’s latest stock recommendations, make sure you hook yourself up with a risk-free trial membership to The White Cap Report. In it, Marc analyzes the most promising small-cap stocks and uses his expertise in the healthcare and biotech sectors to identify the companies with potential breakthrough, blockbuster drugs. You’ll also get the latest economic insights and stock picks from fellow Investment U writers, Louis Basenese, Robert Williams and Matthew Weinschenk. To get more details, click this link.
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- Pocketing Nice Dividends with Hot Small-Caps
- Biotech Stocks: The Market’s Best Bargain Right Now…
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Marc Lichtenfeld is embedded in the biotechnology and healthcare sectors. As Healthcare Specialist for The White Cap Research Group, his days are spent tracking the clinical trials of various companies seeking FDA approval on pharmaceuticals, which oftentimes means interacting with CEOs of companies.
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