As I noted last week, over the past seven years one of the smartest things you could have done was to invest each January 2 in the 10 stocks that Wall Street analysts liked the least.
Since January 2, 2008, that strategy would have turned each $100 into about $270, compared to about $170 for someone who just bought and held the S&P 500 SPX, +1.34% stock index, before trading costs and taxes.
There is research implying that this strategy has worked for far longer than the past seven years — it may indeed have worked for many decades — but I’ve only been tracking the data since 2008.
This is more than happenstance. The stocks everyone hates are often underpriced in relation to their fundamentals. Their stock prices are artificially depressed by the institutional and psychological biases of Wall Street, which lead too many investors to think and act as a herd.
Last year the 10 stocks in the S&P 500 rated the least popular among analysts — in other words, those with the fewest “buy” recommendations, and the most “sell” ones — at the start of the year turned in an average return of 19%, compared to 14% for the S&P 500.
So, which are the most hated stocks for 2015?
It’s surprisingly diversified, from oil drilling to soup. The price-to-earnings ratios are also surprisingly high for unpopular stocks — you might expect them to be below the market average, which is around 16 times forecast earnings — but companies under a cloud often have artificially depressed earnings. The dividend yields look juicy, but they need to be taken with tablespoon of salt, especially the supposed 10%-plus yields sported by the two drilling companies. Yields that high usually signal that Wall Street expects the dividend to be cut.
All stock investment involves risk — individual stocks generally more so than the overall market. Nonetheless, stocks that are currently out of fashion offer some intriguing potential. For example, they generally find it easier to beat analyst expectations than those currently in favor.
Will this portfolio beat the Street again this year? We’ll have to see.
And if you are wondering, the 10 S&P stocks that are the most popular among Wall Street analysts are: H&R Block HRB, +2.53% ; energy contractor Quanta Services PWR, +2.25% ; instruments makers Danaher DHR, +0.62% and Thermo Fisher Scientific TMO, +0.93% ; asset manager Affiliated Managers Group AMG, +0.52% ; Google GOOG, +1.03% ; pharmaceuticals company Actavis ACT, +1.86% ; real estate adviser CBRE Group CBG, -0.45% ; power company NRG Energy NRG, -1.02% , and trucker Ryder System R, +1.60% .
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