The analyst community is monitored closely for their opinions on stocks. Just look at how much a stock will gap higher or lower based on a single upgrade or downgrade.
Many investors follow analysts' recommendations as they like to buy and hold along with the "crowd." Let's face it, there's a feeling of security knowing that there are others buying or selling what you are buying or selling. But for us, the analyst rankings serve as a better tool, one that helps us to beat the market.
If you have the ability to determine when a stock is more likely to get upgraded by the analysts, then you've got the potential to get into a stock before it gets the boost of the upgrade buying. This is why we track the performance of our database of 7,000 stocks against their respective rankings. The concept is simple: Stocks that are outperforming the market that have low analyst rankings are more likely to see upgrades in the relatively near future.
Typically, we like to look at companies that have more than 20 analysts covering them, as a stock with very few analysts has less of a chance for upgrades. For today's purposes, we've filtered for companies that have outperformed the S&P 500 by more than 20% over the past three months, providing an interesting list of prospective intermediate-term bullish candidates for the new year.
Starting at the top of the list, this mega-bank spent much of 2012 dealing with uncertainty surrounding potential increases in regulation in the banking industry. The fact that share prices remained below the $10 mark served as a Scarlet Letter of sorts as fund managers and professional money managers often avoid such low-priced shares.
Now, for the first time, the technical picture for BAC is improving as the price is preparing to cross above the 200-day moving average for the first time since 2007 (yes, nearly five years). The improved technical picture, along with a fundamental improvement in the balance sheet, should get the upgrades rolling in 2013. We're targeting a move above $15 before May of 2013.
Recommended Trade Setup:
-- Buy BAC at the market price
-- Set stop-loss at $10.50
-- Set initial price target at $15 for a potential 33% gain in five months
United States Steel Corp. (NYSE: X)
The steel sector has taken a beating since peaking in 2011. Lower demand for steel due to a slowdown in global economies (China, etc…), along with weaker demand in the auto industry, have had the steel manufacturers on the ropes.
As we move into 2013, the global economic outlook appears to be leveling off, if not improving. In addition, the latest expectations from Detroit are that we will see a gangbuster year in auto sales as improving consumer sentiment and an aging commercial fleet will push buyers into the showrooms.
Technically, X shares are getting healthier. With a recent rally to the $24 level, X has broken above its short-term and intermediate-term technical trendlines, suggesting that the stock is ready to see a long-term improvement in price activity. We're expecting these factors to drive some of the 22 analysts covering the stock to start upgrading their views, helping to move X to the $35 price point before the end of May.
Recommended Trade Setup:
-- Buy X at the market price
-- Set stop-loss at $23.35
-- Set initial price target at $35 for a potential 46% gain in five months
Yahoo (NASDAQ: YHOO)
This Internet icon appeared to be all-but-dead as leadership problems in the boardroom led to fledgling stock prices. With the new CEO Marissa Mayer at the helm, the company appears to be on a path to realizing their brand potential again.
Following up on the CEO hire, December has seen some changes of board members, which will likely help the fundamental drivers for the stock. Will YHOO be the next Google (NASDAQ: GOOG), probably not, but they are turning up the heat in the content world again.
We've already seen Goldman Sachs (NYSE: GS) add the stock to its "conviction buy" list recently, but 72% of the analysts covering the stock still have it ranked a "hold" or "sell."
YHOO prices have outpaced the S&P 500 by more than 25% over the past three months as the stock is now trading in its own bull market rally mode. Breaking through the $20 price will free up room for YHOO shares to surge to $25. In our opinion, this is likely to happen before the end of April, sooner if the analyst community wakes up to this performer.
Recommended Trade Setup:
-- Buy YHOO at the market price
-- Set stop-loss at $18
-- Set initial price target at $25 for a potential 29% gain in four months
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