What are we looking for?
Stocks with strong analyst support.
With investors ever more preoccupied with the possibility of a correction, the market has turned its favour toward the safety of established, well-regarded companies.
As a way of identifying well-positioned larger-cap stocks, we turned to analyst recommendations. Since more speculative stocks tend to generate more disagreement among analysts, we went looking for U.S. stocks with an unusually high level of sell-side support.
How did we do it?
First, we screened by market capitalization. Large-cap stocks have been widely outpacing small caps so far this year as investors seek safety in size. We excluded companies with less than $2-billion in market cap.
Next, we set criteria for consensus opinion. Eligible stocks first needed to have a respectable following, with no fewer than 10 analysts issuing ratings. The average rating among those analyst needed to be very high – at least 4.5 on a scale of 5 as calculated by Bloomberg, with a higher number indicative of a more favourable recommendation.
We also wanted stocks with reasonable valuations, so we capped the price-to-earnings ratio at 20.
Finally, having established a pool of stocks with high expectations, we further screened for those that have surpassed those expectations. To make the list, companies need to have posted an earnings beat in its most recent filing, with reported earnings per share coming in higher than EPS as estimated by analysts.
What did we find?
Of the 16 U.S. stocks that met all of our conditions, only Delta Air Lines Inc. garnered a perfect 5.0 consensus recommendation. Delta has realized strong recent earnings growth, and has a plan to decrease debt and increase shareholder returns.
The remaining companies on the list are most heavily weighted in the consumer discretionary sector, which has benefited from the U.S. economic recovery, household deleveraging and the rebound from a rough winter.
As always, investors should conduct their own research before making any investment decisions.