Well, as first-quarter earnings reports conclude over the next few weeks, I’ve spotted another key reversal that you can profit from: This time it’s a reversal in popularity.
Pop-stocks lose favor
It hasn’t been easy to be invested in popular stocks lately as we’ve witnesses several high-profile earnings misses from some of America’s most widely held companies, including Microsoft (MSFT), Starbucks (SBUX), Goldman Sachs (GS) and Apple (AAPL).
The problem with popular stocks is they carry very high investor expectations for sales and profit growth.
And when they fall short of the mark, even if only by a little bit, these stocks are vulnerable to sharp selloffs.
In fact, according to Bloomberg, stocks that failed to live up to high expectations this quarter have seen their share prices excessively punished as a result, based on analysis from Sanford C. Bernstein & Co. Interestingly, the opposite has also been true.
Ugly stocks reap rewards
Unpopular stocks with relatively low expectations have been disproportionately rewarded, even when they post mixed results. Better yet, many of these ugly-duckling stocks have been richly rewarded with sharp rallies after posting positive earnings surprises.
|Popular vs. unpopular: Who wins?|
The numbers according to Bernstein analyst Ann Larson: Popular stocks (those with high institutional ownership) gained just 0.6% on average after beating or matching earnings estimates.
Meanwhile, they lost nearly 6% on average when falling short of forecasts.
Unpopular stocks by contrast, soared 4.8% higher after matching forecasts or posting positive earnings surprises. And they rose an average of 2.2% even after missing estimates.
As Larson puts it: “Crowded trades (popular stocks) are typically already priced for perfection.” Meanwhile, excessive “pessimism” allows for “additional upside from positive news.” Well said!
If first-quarter results are a prologue, investors’ preference for unpopular stocks could prove to be a lasting trend to take advantage of. Where to look?
Opportunity in the market’s most hated sectors
Digging a bit deeper, the most crowded (popular) trades right now are in the real estate and consumer discretionary sectors. That’s according to a recent Merrill Lynch Fund Manager Survey. Meanwhile, the most unpopular sectors for institutional investors right now are emerging markets, and … you guessed it: energy!
|“You may want to look twice at any high-flying REITs or discretionary stocks in your portfolio.”|
Therefore, you may want to look twice at any high-flying REITs or discretionary stocks in your portfolio before they next report earnings. And if you decide to sell: Check out fresh buying opportunities in emerging market and energy stocks.
Not coincidentally, the stock market’s most hated sector: Energy also happens to be the best performing sector over the past month: Up 9.3% compared to a gain of just 1.9% for the S&P 500 Index!
They’re back! Wal-Mart (WMT), the retail giant, said the greeter will return to the front door of its stores after an absence of several years. The retailer had moved greeters to other duties a few years ago. “We’ve been working to welcome customers to an improved Wal-Mart for some time now, and of the countless details we’ve taken a look at, a key piece has been better utilizing an important role – our greeters,” the company said.
The tradition of having a greeter at the store entrance was started by late founder Sam Walton. The company said greeters will act as a “customer host,” who will greet customers but also check receipts to prevent theft. They will be trained to help deter potential shoplifters.
Will this make a difference to you, Wal-Mart shoppers? Comment below.
Another move could make flying a (slightly) more enjoyable experience. British Airways (IAG) said passengers will be able to stream films on trans-Atlantic flights next year after the airline’s owners announced a deal to install what it claims will be the fastest Wi-Fi in the air.
Many airlines now offer in-flight Wi-Fi, but it has usually been much slower. It allowed emails and internet browsing but it wasn’t fast enough for streaming and other more intensive services. British Airways hinted its service would be for free for basic browsing, with charges for a faster service allowing downloads and video streaming. But it hasn’t made a final decision on pricing. The technology could also allow for Skype or FaceTime conversations, but those services could be blocked to avoid annoying other passengers.
The service will be provided by Gogo (GOGO), a Chicago communications firm, which has provided web access for U.S. flights largely through ground-to-air networks. Its new “2ku” technology uses satellites, lowering the operating costs for airlines.
Do you pay now for in-flight Wi-Fi? Would you pay more for high-speed service? Comment below.
Drones could soon be used to transport urgently needed organs to medical patients. Ehang, a Chinese drone company, revealed the 184 AAV (autonomous aerial vehicle) at the 2016 Consumer Electronics Show. It is a huge drone that could also transport a human passenger as far as 10 miles.
Reports state that Ehang is being commissioned by Lung Biotechnology, a subsidiary of United Therapeutics (UTHR), to build 1,000 drones based on the 184 design that’ll deliver organs to a network of hospitals. “We anticipate delivering hundreds of organs a day, which means that the … system will help save not only tens of thousands of lives but also many millions of gallons of aviation transport gasoline annually,” Lung Biotechnology Chairman and CEO Martine Rothblatt was quoted by Digital Trends as saying.
Mow-to-own? St. Louis Mayor Francis Slay announced a new effort aimed to cut down on the city’s vacant lot problem. “The land we’re standing on is actually owned by the city’s land revitalization authority … It’s one of the nearly 4,000 small vacant lots in the city of St. Louis that sits next to somebody’s home,” Slay said, according to KSDK-TV. To combat this issue, aldermen have created the mow-to-own program for St. Louis residents.
Residents pay $125 for the vacant plot of land next to their home if they promise to maintain the property, including mowing and cleaning up the debris on the property. The land would be granted to the owner once they maintain it for at least two years. Land not claimed by residents will go to the city’s land revitalization authority.
The Money and Markets team