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Analysts can’t agree about these stocks — and that could make you money

Analysts are split on Exxon Mobil.

Now that we’re in the middle of earnings season, it’s easy to say that the quarterly game of companies “beating” earnings estimates is just a game.

The unfortunate thing is that the ill-advised focus on short-term results can send a company’s shares down rapidly, whether or not business in that three-month period is part of a longer-term trend. Also, analysts have a habit of piling on and downgrading a company after bad news has been announced. In that way, what do the ratings really mean?

Those ratings, en masse, are highly questionable. Want proof? Consider this: There are no S&P 500 SPX, +0.31% companies with majority “sell,” or equivalent, ratings among sell-side analysts. Here are a few more numbers about ratings of S&P 500 companies:

• Of 505 S&P 500 stocks (because five of the companies have two classes of common shares included in the index), 224 have majority “hold,” or neutral, ratings.

• A total of 225 have majority “buy,” or equivalent, ratings. Two have 100% “buy” ratings: Align Technology Inc. ALGN, +3.38% and Delta Air Lines Inc. DAL, +0.12% Those are impressive votes of confidence.

It’s clear that analysts don’t like to assign “sell” ratings to companies. One reason for this is the speed of the market. Bad news is baked into share prices quickly.

So analysts don’t have crystal balls. But each quarter, about 70% of S&P 500 companies “beat” their consensus earnings estimates. If you speak to an individual analyst, you will understand he or she knows industries and companies quite well. But it’s the nature of the beast: Companies tend to set low expectations, and analysts can’t help but to follow suit with the limited information available to them.

So you need to take the quarterly numbers with a grain of salt, unless they are part of a long-term troubling trend, as they have been for General Electric Co. GE, +1.03% and Chipotle Mexican Grill Inc. CMG, -2.11% among others.

Split ratings

We decided to dig deeper into the ratings data supplied by FactSet to see which S&P 500 companies that analysts disagreed about the most. With so many neutral ratings and so few “sell” ratings, we focused on the 11 companies with at least 20% “sell,” or equivalent, ratings that also had at least 20% “buy,” or equivalent, ratings. Here they are, sorted by the share of “buy” ratings:

Company Ticker Industry Share ‘buy’ ratings Share neutral ratings Share ‘sell’ ratings Total return - 2017 through Nov. 1
Idexx Laboratories Inc. IDXX, +2.40% Medical Specialties 55% 18% 27% 36%
Express Scripts Holding Co. ESRX, +0.36% Health Industry Services 40% 40% 20% -9%
General Electric Co. GE, +1.03% Industrial Conglomerates 40% 40% 20% -35%
PerkinElmer Inc. PKI, -2.01% Medical Specialties 33% 47% 20% 39%
Southern Co. SO, -1.52% Electric Utilities 32% 47% 21% 10%
ResMed Inc. RMD, +0.30% Medical Specialties 31% 44% 25% 40%
Exxon Mobil Corp. XOM, -0.41% Integrated Oil 26% 52% 22% -4%
Scana Corp. SCG, -0.76% Electric Utilities 25% 50% 25% -40%
Apache Corp. APA, +2.57% Oil & Gas Production 24% 48% 28% -32%
Unum Group UNM, -0.85% Life/ Health Insurance 21% 58% 21% 20%
Amaren Corp. AEE, -0.24% Electric Utilities 20% 60% 20% 21%
Source: FactSet

You can click on the tickers for more information, including price ratios, charts and financials. Maybe you have conviction about one or more of these stocks for a long-term investment, or maybe you feel that oil prices will stabilize and rise over the next several years. If so, maybe the negativity among analysts is presenting you with a long-term value opportunity right now.