Stocks That Rise From Downgrades

Negativity is fully discounted. A spate of downgrades and analyst negativity often coincides with the low for a particular stock. When companies have problems and issues that are already well-known, an analyst downgrade in the face of those problems can be overkill. Investors tend to focus on short-term negatives and ignore the long-term positives. For HCA, CarMax and Boeing, all of the bad news that was front and center in the analyst reports was already fully discounted in their stock prices, and then some.

Analyst opinions are a proxy for the crowd. When companies are getting downgraded en masse, it is an excellent proxy for the crowd. In any distribution of performance outcomes, the consensus will always be, by definition, average. Investors seeking to outperform must be capable of acting in ways that are dissimilar to the crowd. So, it follows, then, that the universe of companies getting hit with negative analyst opinions is fertile ground for bargain-hunters.

Of the companies today that are enmeshed in analyst negativity, which ones represent compelling value? Here are a few names to consider.

Eastman Kodak

Analysts are nearly unanimous in their negativity on Eastman Kodak (EK - commentary - Cramer's Take). Selling at about 10 times current-year earnings, this stock reminds me of Boeing a couple of years ago.

Despite all of the negativity, the demise of this company is nowhere in sight. The migration from film to digital photography is going to be uneven and inconsistent -- it certainly won't fit well with analysts' preference for linearity. But the reward for patient investors here is ample. In two to three years, I expect Kodak's stock to double from current levels.

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At time of publication, Alsin and/or Alsin Capital Management was long Boeing, CarMax, Eastman Kodak and AON, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail].