It feels wrong, but most of the time this simple move will result in buying stocks that outperform the market… by a huge margin.
I’m talking about taking the other side of Wall Street analyst’s bets, when it makes sense. I’ll explain when it makes sense below.
Investing in stocks that Wall Street hates can be an incredibly strong strategy. The approach uncovers a lot of “diamonds in the rough” that often present significant opportunities for upside surprises.
Put simply, this contrarian approach to investing capitalizes on the potential that lies in overlooked or undervalued companies, where the general sentiment is overly pessimistic.
But you’ve got to be careful when deploying the strategy.
Buying the “Most Hated” stocks only works when you add two key factors into your trading analysis.
It’s relatively simple to say and follow… Don’t buy bad stocks.
Investors get tied in a knot trying to over-analyze the fundamentals of a company before buying their stocks.
Sure, the fundamentals will lead to long-term performance of a stock, but over the last 20 years there is plenty of data that shows that sentiment and technical trends are more influential on a stock than its fundamental snapshot.
For this reason, I always focus on two questions:
If the answer to those two questions are “yes” I’ve got a stock that I can consider for intermediate- to long-term growth.
The evolution of online trading has increased the use of technical analysis to levels that most investors would have never imagined.
Technical analysis in its various forms is being used by most Investors. From institutional algorithm traders to the average retail investors, if you’re not using simple as simple as trendline analysis as part of your research you’re missing opportunities left and right.
There’s a rule I have followed for years, “Keep it Simple Stupid”. That’s right, the “KISS” rule is one of the most important in technical analysis.
With thousands of potential combinations of trendlines, oscillators and other indicators, it is easy to slip into “analysis paralysis”. For that reason, stick to just one of two time-tested indicators.
Mine are the 50- and 200-day moving averages. They’re simple and effective.
Specifically, I look for stocks that are above their 50- and 200-day moving averages. I also consider the trend of those trendlines.
Historically, if a stock’s 50-day moving average is trending higher it means that the stock has a 66% chance of closing higher every day. The reverse is true as well.
Using the information above, here is the simple equation for a timely Contrarian Buy…
Look for stocks that are underappreciated. A simple way to do this is to look for stocks that Wall Street analysts have ranked as a sell.
Look for strong technicals.
It doesn’t seem normal, but there are several stocks that are outperforming the market with strong technicals that Wall Street has ranked as sells. These stocks are in the sweet spot for contrarian trades.
Finally, confirm that the stock price action is being driven by strong fundamentals.
Strong revenue and earnings are the name of the game. It really is that simple.
If you follow this simple strategy you will find the stocks that are likely to become targets of Wall Street upgrades, driving even more outperformance of the stock prices.
Two Stocks Climbing Wall Street’s Wall of Worry
The following table displays five stocks that are ranked “strong Sells” by Wall Street analysts, despite strongly outperforming the market.
Lemonade (LMND) is one of the insurance companies that has revolutionized its industry with its tech-driven platform. The company uses artificial intelligence to expedite claims and underwriting.
Specializing in property and casualty insurance, it offers products like homeowners, renters, pet health, and term life insurance.
Both revenue and earnings have outperformed Wall Street analyst’s targets for the last year as Lemonade’s business model continues to grow.
The stock has outperformed the S&P and other indices with its one-year performance of 160%. The stock also outperforms all of its peers in the insurance industry.
Shares of LMND are trading well into bull market territory with both its 50- and 200-day moving averages in bullish trends.
Despite the strength, Wall Street analysts have been determined to maintain their “sell” ratings on the stocks.
The combination of positive fundamental and technical strength will cause analysts to begin upgrading Lemonade shares in 2025, resulting in the stock moving even higher.
Investors should target a move to $75 per share in 2025.
Garmin shares have been on a tear over the last three years, finishing 2024 with gains above 70%.
The company was seen as a one trick pony with the popular driver navigation units before Google Maps and other navigational aids came along, but those that know Garmin know why the company continues to excel.
Garmin is GPS technology, including automotive, aviation, marine, outdoor, and fitness.
Founded in 1989, Garmin has expanded its product line to include wearables like smartwatches, sophisticated avionics for aircraft, navigation devices for cars and boats, and rugged devices for outdoor enthusiasts and athletes.
The company’s revenue continues to grow at 24% as both their professional and wearable technology experience strong growth.
Garmin shares are currently ranked a “buy” by only 20% of the analysts covering the stock, despite its 75% one-year gains.
The stock trades above both its 50- and 200-day moving averages, both of which are in a strong bullish trend.
Garmin shares recently moved above the $200 level, a psychological price that is likely to draw attention, and upgrades, from professional analysts.
Garmin stock maintains a bullish outlook with a price target of $250.
