How to Consistently Find the Best Buys
I’ve never considered myself to be a contrarian investor. But an article in this week’s Barron’s suggests that contrarian investors can easily beat any of the stock market indexes, beat Warren Buffett, and even beat mutual fund and hedge fund managers.
Before I reveal Barron’s discovery, I’ll give you some background. When I became a fledgling stockbroker 50 years ago, my employer was one of the biggest and best brokerage firms on Wall Street. I noticed right away, though, that the firm’s stock picks and research reports were not as good as most people think.
And now my view of brokerage firms’ research has been confirmed by Barron’s. Although there are many bright brokerage analysts, their aggregate opinions and views are a poor guide for investors. In fact, when brokerage analysts say buy, you should sell. When brokerage analysts say sell, you should buy.
That’s right! Brokerage analysts generally are wrong more than they are right. Research firm Bespoke Investment Group looked at the simple price returns of the lowest-rated and highest-rated stocks recommended by Wall Street brokerage analysts during the past 13 years,. On average, since 2002, the lowest-rated stocks with sell opinions rose an average of 13.0% annually, easily outperforming the highest-rated stocks with buy opinions, which were up 9.5%, and the S&P (Standard & Poor’s) 500 Index, which was up 6.5%.
But one survey is not sufficient to guide your investment decisions. Another study conducted by Charles Schwab for the years 1994 to 2004 also found that low-rated stocks easily beat the best-rated stocks.
My conclusion from these two research studies is this: When brokerage analysts totally agree to buy a stock, who’s left to buy the stock? No one. So when should you buy a stock? When most analysts are screaming “sell.”
The table below depicts Bespoke Investment Group’s findings for the lowest (sell) and highest (buy) rated stocks. I have added my performance numbers for the Cabot Value stocks, Warren Buffett’s Berkshire Hathaway performance, the Hennessee Hedge Fund Index and the S&P 500. You’ll note that my Cabot Value stocks beat all of the analysts, the indexes and even Mr. Buffett!
Should You Invest in GE, Apple, Alibaba, Facebook, Twitter, Tesla?
To find out the brokerage analysts’ opinions on a stock, just send me an email to TimothyLutts@cabotwealth.com and I’ll send you a summary of the analysts’ opinions. Keep in mind: if most analysts are recommending that you buy a stock, you should avoid it.
Keeping in mind the lessons learned above, I searched my database for a stock that nobody likes. This contrarian pick qualifies in all respects for the ultimate stock rated “sell” by almost all analysts. Without question, Francesca’s Holdings (FRAN) is unloved now, but the stock could become a big winner during the next three to six months.
Francesca’s Holdings (FRAN: Current Price: 17.27) is a specialty retailer with 571 boutiques in 47 states and the District of Columbia. The company offers a broad selection of women’s apparel, jewelry, accessories and gifts targeted to fashion-conscious 18- to 35-year-old customers. Merchandise is also available through Francesca’s direct-to-consumer website. Francesca’s offers limited quantities of styles and introduces new merchandise to its boutiques five days a week. The company’s methods create a sense of scarcity and freshness for shoppers, spurring customer loyalty and driving shopping frequency.
Analysts dislike Francesca’s because same-store sales declined 5% and earnings per share dropped 25%—despite its sales increase of 11%—during the 12 months ended 1/31/15. However, management added 88 new stores in 2014 and plans to add 85 new boutiques in 2015—which is likely to boost sales and earnings.
FRAN tumbled from a high of 35 in mid-2012 to a low of 12 in October 2014 on the disappointing sales and earnings results and the former CEO’s unexpected departure before recovering to the current 17. The company has a solid balance sheet with minimal debt and plenty of cash. The stock’s current price-to-earnings ratio of 22.7 is high, but I expect earnings will increase 15% per year during the next five years. I recommend buying FRAN at the current price.
For more timely advice, follow me on Twitter: I’m “@J_Royden_Ward” and I send out at least one interesting Tweet every day!
Until next time, be kind and friendly to everyone you meet.
J. Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor
You can read more about Francesca’s and get continuing coverage in Cabot Benjamin Graham Value Investor. There you’ll not only find buy and sell advice for FRAN, you’ll also discover an ample array of growth stocks selling at bargain prices. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 275 stocks plus my up-to-date predictions for the Dow Jones Industrial Average.