When I was an analyst at the uber-contrarian Avalon Research Group, we only initiated coverage on a stock if our opinion went against the consensus, or if the security was barely (or not at all) followed by Wall Street.
For this column, I'm going to focus on the latter - and show you how this seemingly unconventional investment strategy can actually make you a lot of money.
If you want quantifiable proof, consider this nice bit of research from Cem Demiroglu at Koc University in Turkey, and Michael Ryngaert at the University of Florida: In 2008, they conducted a study that showed that stocks without any analyst coverage experienced a 4.82% higher return than their peers after coverage initiation.
The lesson here is simple.
Owning stocks that Wall Street doesn't follow is usually a sure-fire way of getting in before the crowds.
Stocks that lack Wall Street's sponsorship in the form of analyst coverage are known as "orphan stocks." And there's a big advantage to owning these orphan shares.
When you buy stocks before analysts cover them, there usually aren't many institutional owners. But once firms like Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) start recommending them to their hedge- and mutual-fund clients, it often triggers new and heavy demand for the shares.
Plus, just having a new "Buy" rating flash across the news ticker can often be enough to move a stock higher all by itself.
When talking about neglected stocks, Greg Forsythe, senior vice president of Equity Model Development for The Charles Schwab Corp. (Nasdaq: SCHW), explained it the best when he said: "Explorers seeking new lands don't look where others have already been."
So let's explore some stock territory that Wall Street hasn't yet discovered...
Here's another neglected stock for your consideration...
To get in while the gettin's good, you often need to buy stocks before you hear about them from analysts. As a quick guide, look for companies that have healthy balance sheets, trade at reasonable valuations, and aren't receiving much attention from Wall Street.
Follow this formula and you're likely to outperform many of those Wharton MBA types who crunch numbers into their spreadsheets for 15 hours a day, trying to figure what out Apple Inc.'s (Nasdaq: AAPL) revenue will be. View their neglect as your call to action - and use it to your advantage.
[Editor's Note: Healthcare and biotech expert Marc Lichtenfeld is the director of research for the Access Research Group. He's also the resident healthcare specialist for White Cap Research and The White Cap Report's mid-month issue, The Xcelerated Profits Report.
To keep tabs on all Lichtenfeld's latest stock recommendations, hook yourself up with a risk-free trial membership to The White Cap Report. In it, Lichtenfeld analyzes the most promising small-cap stocks and uses his expertise in the healthcare and biotech sectors to identify the companies with potential breakthrough, blockbuster drugs. For more details, please click here.]
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