Markets & Finance

Stocks: S&P vs. the Herd


This week's screen looks for issues that carry S&P's highest investment scores, but get a cool reception elsewhere on the Street

From Standard & Poor's Equity ResearchWhile there is some debate as to which is harder—herding cats or getting equity analysts to agree on the merits of particular stocks—our money is on the latter. Surveys of analyst opinions on stocks feature a broad range of opinions. According to I/B/E/S, for example, of the 33 investment recommendations it tabulates for Microsoft (MSFT), 17 are "buy," 11 "buy/hold," 10 "hold," and one "sell."

We at Standard & Poor's have our own equity research operation, with a team of analysts covering more than 1,600 stocks, offering recommendations based on fundamental analysis. While our analysts' opinions often coincide with those of other research outfits, there are times when S&P's opinions zig while the rest of the Street zags. Differing analyst recommendations typically stem not from opinions on company fundamentals but rather on the valuation—whether analysts believe stocks are sufficiently priced based on their future earnings potential or there is room for future capital appreciation.

That was the inspiration for this week's screen, with the emphasis on stocks that carry S&P's highest rankings under its Stock Appreciation Ranking System (STARS) and proprietary Fair Value model, while the consensus opinion for the rest of the Street is only so-so.

Relying on Proprietary Research

We started with our list of stocks ranked 5 STARS (strong buy) based on fundamental research conducted by S&P's own analysts. Stocks with that designation are expected to outperform the Standard & Poor's 500-stock index on a total return basis by a wide margin over the coming 12 months, with the shares rising in price on an absolute basis.

To fine-tune this list, we next turned to one of our proprietary measures, S&P's Fair Value model, a quantitative stock ranking system. The model calculates a stock's weekly Fair Value—the price at which it should trade at current market levels—based on fundamental data such as corporate earnings and growth potential, return on equity, current yield relative to the S&P 500, and price-to-book value.

Stocks are ranked from 5, indicating significant undervaluation compared to the Fair Value universe, to 1, indicating significant overvaluation. We looked for those issues ranked 5.

Potential Investment Opportunities

Then we ventured outside our offices to survey what the rest of the Street thinks. We looked for those issues for which the average consensus Wall Street recommendation is "hold." To make sure we had a decent sample size, each stock had to have at least seven analysts providing coverage in the current quarter.

When we finished the screen, three names turned up. We're not necessarily saying that S&P analysts are right where the conventional wisdom is wrong, or vice versa. The lower investment opinions held by other outfits may keep the prices down on these issues, thereby providing a potential opportunity for investors if these companies post positive earnings surprises in the future.

Here are the names, along with a brief description of why S&P is positive on the shares:

Company

S&P Rationale

Chubb (CB)

Attractive valuation

Cimarex Energy (XEC)

Attractive valuation, high energy prices

MKS Instruments (MKSI)

Competitive advantage over peers

Kaye, an analyst for Standard Poor's Portfolio Services, is the author of The Standard Poor's Guide to Selecting Stocks.

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