Stockpickr: The Top Contrarian Plays

Here are stocks to buy when the analysts say sell.
Author:
Publish date:

In his latest book,

Mad Money: Watch TV, Get Rich

, Jim Cramer describes a strategy he likes to pursue -- doing the opposite of what Wall Street analysts are doing, specifically if a stock is moving conversely to analysts' ratings.

For instance, if analysts have a sell rating on a stock but the stock is up 50% off of its lows, then it's a good time to buy.

How come? As Jim says in the book, the analysts "are bad at admitting mistakes." Once proven wrong, they will "hide their shame for getting it wrong." And this is how he games the moment when analysts start upgrading.

On Stockpickr, we've set up an

analyst contrarian portfolio

. The stocks in this portfolio all have sell ratings on them and are significantly off of their lows.

I also looked for criteria that make the stocks buyout candidates, such as increasing cash flows and low multiples of market cap over cash flows.

One such name is

American Eagle Outfitters

(AEOS)

. This name is really unloved.

Investment bank Thomas Weisel initiated coverage of American Eagle last week with an underweight rating. Citigroup downgraded the stock in October of last year from hold to sell, followed by UBS changing its rating from buy to neutral.

It seems to me that the 11th circle of Wall Street hell is everyone simply thinking your stock is "neutral."

However, American Eagle's stock has consistently proven the critics wrong over the past year.

The stock trades for just 10 times cash flows, making it a potential buyout candidate as well. The company has a market cap of $7.3 billion and net cash of over $800 million sitting in the bank, giving it an enterprise value of just $6.46 billion. The $627 million in cash flows makes this a cheap stock.

American Eagle Outfitters (AEOS)

Furthermore, the analysts, despite their ratings, believe revenue and earnings are going up. The 28 analysts surveyed believe revenue at American Eagle is going from $2.75 billion in 2006 to $3 billion in 2007. And they believe the company will earn $1.89 per share in 2007 vs. $1.69 per share in 2006.

American Eagle has exceeded expectations for three quarters in a row, and analysts have raised their estimates over the past 90 days.

From a macro perspective, analysts are worried that consumer spending will slow or that the stock has already run too far. But for the moment, the executives at American Eagle seem to be safely ignoring Wall Street.

Some of the top mutual funds have also been ignoring Wall Street when it comes to American Eagle, the

Al Frank fund

being one of them. American Eagle has also shown up recently on the

Investor's Business Daily

list of

top-rated stocks

rising on unusually high volume.

Another stock unloved by analysts is

RadioShack

(RSH)

. The company also trades for about 10 times cash flows, with an enterprise value of about $3.3 billion and EBITDA -- earnings before interest, taxes, depreciation and amortization -- in the last 12 months of $323 million.

RadioShack has clearly bounced off the lows, despite analysts continuing to downgrade the stock.

RadioShack's stock was hurt by

Circuit City's

(CC) - Get Report

announcement of disappointing earnings last year, and several analysts downgraded the entire sector. In addition, for the past three quarters, RadioShack has failed to impress in terms of its own earnings, which were coming in below analyst expectations.

But RadioShack is currently 80% off its lows, and as Cramer suggests in his book, at some point analysts need to reverse themselves to avoid embarrassment. Currently, investment bank Stifel Nicolaus has the stock at sell, down from hold. Jefferies rates RadioShack at underperform, down from a hold, and several other analysts have the stock at underweight.

RadioShack (RSH)

That said, two weeks ago Goldman Sachs upgraded RadioShack to a buy. Goldman Sachs analyst Matthew Fassler called RadioShack "a classic turnaround opportunity." He expects the company to earn $1.20 a share, significantly higher than the average estimate of 91 cents a share. More upgrades should follow, and I wouldn't be surprised to see RadioShack hit $30 this year. Analysts have been bullish on the earnings prospects for RadioShack, with earnings per share expected to go from 75 cents in 2006 to 91 cents in 2007, a 20% increase.

RadioShack is also owned by a hedge fund that specializes in retail chains called Hayground Cove, which is run by former Bear Stearns analyst Jason Ader. Hayground recently had success with

Denny's

(DENN) - Get Report

. Another fund I've written about previously that owns RadioShack is the

Olstein Fund

, run by Robert Olstein. That fund was an activist on

Jo-Ann Stores

(JAS)

and did very well. RadioShack also appears on

Fortune's top 10 stocks to own for 2007

.

A few of the other stocks that made the portfolio include

Navistar

(NAV) - Get Report

,

Rite Aid

(RAD) - Get Report

and

Amkor Technology

(AMKR) - Get Report

. Check out the full list of

stocks that are part of the contrarian-plays portfolio on Stockpickr.

.

Stockpickr tip of the day

: Money manager Mebane Faber has set up two very interesting portfolios on Stockpickr. One is called the

Activist Consensus portfolio

, made up of stocks that the top activist hedge funds have been accumulating. The other is called the top

Hedge Fund Consensus portfolio

, made up of stocks owned the most by value-oriented hedge funds.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

click here

to send him an email.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.