There might be something to that Goldilocks story.
From time to time, Barron’s tries to find average stocks, rather than the hot issues beloved by analysts or the coldest ones, which struggle to pick up Buy ratings. Run-of-the-mill, OK stocks can serve as a benchmark to identify what is exceptional and what is terrible.
It turns out, however, that average stocks can offer more than that, holding their own against the broader market.
Defining average isn’t as easy as investors might think.
Lots of metrics suggest themselves, including profit margins, growth, and valuation multiples, but Barron’s focuses on how Wall Street sees companies in identifying those ordinary businesses. We track Buy-rating ratios—the number of Buy calls for a stock divided by the total number of Wall Street ratings—-and the average upside implied by average analyst price targets.
For the
S&P 500,
the average Buy-rating ratio is about 55% today. And the average upside based on consensus target prices is about 15%.
Average upside, however, varies by industry. For electric utilities, analysts’ target prices are about 12% above where the stocks trade, on average. For oil producers, the average upside is about 24%.
That makes some sense. Oil prices are volatile and utility earnings tend to be stable. Investors who own utilities are effectively foregoing higher potential return to sleep better at night.
Based on those two metrics, four stocks in the S&P 500 that are the most average today, with a combination of average Buy ratios and average upside, are the utility
Exelon
(ticker: EXC), the logistics company
FedEx
(FDX), the industrial gas producer
Air Products
(APD) and the
Union Pacific
(UNP) railroad.
| Compnay / Ticker | Market Cap (bil) | PE / NTM | Buy-Rating Ratio | Price Target | Upside |
|---|---|---|---|---|---|
| S&P 500 | |||||
| Exelon / EXC | $39.7 | 16 | 55% | 45.21 | 13% |
| FedEx / FDX | 56.4 | 12 | 54 | 251.66 | 12 |
| Air Products / APD | 62.0 | 23 | 56 | 330.14 | 19 |
| Union Pacific / UNP | 121.3 | 17 | 56 | 223.59 | 12 |
| Nasdaq 100 | |||||
| Align Technology / ALGN | 23.8 | 35 | 62 | 354.25 | 16 |
| Booking / BKNG | 96.2 | 18 | 61 | 2899.87 | 11 |
| S&P 600 | |||||
| Oxford Industries / OXM | 1.6 | 9 | 50 | 120.25 | 21 |
| Astec Industries / ASTE | 1.0 | 16 | 50 | 52.33 | 20 |
Source: Bloomberg
In addition to an average 55% Buy-rating ratio and 14% average upside, the four trade for an average of 17 times the per-share earnings they are expected to bring in over the next 12 months.
Their median earnings growth is expected to average about 11% a year for the coming few years.
The median is the point in a set where half of the numbers are higher and half are lower. It is similar to an average, but more useful for certain data sets. Don’t forget that the average wealth of Elon Musk and almost any four other people is about $50 billion per person. Musk skews the traditional average; the median wealth would likely be more like $250,000.
The entire S&P trades for about 16 times earnings, excluding weightings for market capitalization, and median earnings growth is expected to be about 9% a year for the coming few years.
Average can outperform. When Barron’s first looked for average stocks in 2020,
JPMorgan Chase
(JPM) and
FedEx
fit the bill. Both outperformed the S&P 500 from the time we identified them until we checked again in January 2022.
That month, the most average stocks in the S&P 500 and
Dow Jones Industrial Average
were
Johnson & Johnson
(JNJ) and
Ulta Beauty
(ULTA), respectively. Both outperformed their indexes between then and now.
In January 2022, we also looked for average small-cap and growth stocks. The small-cap stock was eyeglass seller
National Vision
(EYE) and the growth stock was
Chipotle Mexican Grill
(CMG). Both outperformed their benchmarks one year after being identified as average.
This time, Barron’s looked at the
Nasdaq 100
for growth stocks. The average Buy-rating ratio for the index is about 62%. The average upside implied by analysts’ price targets is about 14%.
The most average stocks in the Nasdaq 100 today are
Align Technology
(ALGN) and
Booking
(BKNG). Their average Buy-rating ratio and upside are 62% and 14%, respectively, very close to the numbers for the overall 100-stock index.
Align is trading for about 35 times estimated next 12 months’ earnings. Booking is trading for about 18 times. Both are expected to grow earnings close to 20% a year on average over the coming few years, according to Bloomberg.
The most average stocks in the
S&P 600
small-cap index are apparel maker
Oxford Industries
(OXM) and
Astec Industries
(ASTE) a manufacturer of road paving equipment. Their Buy-rating ratios are close to the small-cap average of about 50%. The average upsides implied by price targets are close to the small-cap average of about 21%.
Why average stocks do fine is a mystery. One possibility is that because the market goes up over time, on average, stocks rise. Another possibility is that it is good to be in a comfortable middle, without the hype of being the most popular stock or the problems associated with some of the companies that can’t get any love from Wall Street.
Write to Al Root at [email protected]
Read the full article here
