• The chart below takes all the stocks in the S&P 500 and breaks them into five groups
  • The first group on the left are the stocks analysts loathe (the worst-rated stocks)
  • The last group on the right are the stocks most loved by analysts
  • Stocks analysts dislike trade at a 34% discount to the market
  • Stocks that are analysts’ darlings trade at a 17% premium to the market

Fundamental Analysts are Herding:

In the euphoric mania underway today, this does not surprise us. Consensus thinking among Wall Street analysts is the rule, not the exception. Unfortunately, it is also crippling for investor returns. (To see what we believe are remarkable opportunities in a forgotten asset class, please see our research on growth at a reasonable price for profitable growth stocks that often lack analyst coverage!)

Consensus Stocks Analysts Loathe are Cheap and Stocks Analysts Love are Expensive

We believe stocks with the highest levels of consensus “buy” ratings, the “Darlings,” may be benefitting from self-reinforcing price action as high average returns in these stocks force analysts to shift to buy ratings. Contrarily, we believe that stocks that have the least support from analysts, “Dislikes,” are likely companies that have failed to achieve the spectacular performance in some of the top stocks beloved by speculators today.

In the rest of this post, we will provide evidence that the consensus “Dislikes” stocks appear to offer investors a great deal more value than the stocks analysts love (the Darlings). We believe this foots with common sense: if everyone agrees that something is bad or good, it is likely already in the price!

In this case, we find the fundamentals so compelling that we will be writing a great deal more about this in the near future.

Stock Market Analysts Have a Tough Job

John Maynard Keynes asserted that “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” Having worked as traders, analysts, and portfolio managers for decades, the KCR staff understands this all too well. As certain stock prices move relentlessly higher, we believe fundamental analysis often becomes “technical analysis.”

Bottom-up approaches that work with financial statements and deep dives on balance sheets give way to stock ratings and price targets that are often glorified trend following. We do not say this to criticize the analysts charged with predicting price movements – far from it.

The pressures of remaining employed often undermine the traditional metrics and tools that have proven their mettle over centuries.

The table below shows the fundamental traits of the stocks in the first (Dislikes) and fifth (Darlings) bars above. Compare the two groups. What do you see? Here is what KCR sees going from left to right:


  • Consensus: only 24% of analysts have these stocks buy-rated
  • Returns: they have gone up 43% over the last 3-years (~14% per year)
  • Cheap: they trade at only 2x sales and 15x forward earning
  • Profitable: high ROEs, a stunning 4.4% yield
  • Risk: These stocks have muted risk characteristics (beta of 0.86)

Consensus Buys Darlings are 2x as Expensive and Riskier than Consensus Sells Dislikes


  • Consensus: 85% of analysts agree – these stocks are buys – almost no dissent!
  • Returns: they have exploded 113% over the last 3-years (~30% per year)
  • Expensive: Priced at a 100% premium to the Dislikes (4x P/S vs. 2x P/S) & (28x PE vs.15x P/E)
  • Profitable: these companies are profitable but have less than half the yield (1.7% vs. 4.4%)
  • Risk: these stocks have a beta of “1” – in line with the market – but look at the 3-year growth rates for sales – a stunning 61%

We believe that the top analysts today are those willing to chase firms with high rates of revenue growth. As we addressed in our paper explaining the immense risks to even the highest quality growth stocks, growth rates this high are not sustainable for large cap companies like these. As a result, firms that are ramping up sales aggressively or captured a certain narrative like clean technology stocks have become the DARLINGS of Wall Street.

Our research team believes that this fails the basics of common sense. How long can companies grow revenues at these outlandish rates? Considering the 100% premium in valuation, are these high rates of growth not already priced in? To what degree are the bullish analysts just chasing performance and trying to keep their jobs? What happens when these companies disappoint?

Analysis is a method of attempting to understand current and future share prices with a robust toolset. These tools can include a vast array of qualitative methods like meeting with management, visiting production facilities and trying products. But regardless of those processes, valuation is a critical component of any responsible analyst’s tool kit.

Typically, analysts attempt to use DCFs, private company transaction values, and peer comparisons to cross-check the conclusions. Yet every one of these valuation methods are easily manipulated to achieve the outcomes an analyst “needs.”

In our piece about how analysts choose their peers when setting price targets we showed the data proving that as prices and valuations move higher, analysts actively pick ever more highly valued peers to help justify the higher valuations! We were not then, nor are we now, pointing the finger at anyone. In fact, in that piece, we led out with a tacit admission that everyone on our team had engaged in the exact same behavior!

We have documented the relentless rise of some of the most speculative stocks in history. Our pieces, contrasting high-priced Tech stocks and Staples, exorbitant valuations, the confluence of record debt and high prices, and the explosion of frenetic day-trading have all made the precarious state of markets today obvious.

We have watched in dismay as the market prices of stocks like Twilio rise ever-higher despite minimal revenues and steep losses and do so with the full complicity of sell-side analysts.[2] If you want a stark and shocking example of how the analyst community’s herding is impacting stock prices today, we strongly suggest you check out our updated post on Staples stocks. In that piece of free content, we contrast the valuation of that tech stock with the most proven money-makers out there: consumer staples.

It has been and continues to be our emphatic belief that the herding by analysts and investors into neat stocks today is no different than 1929, 1969, or 2000. As documented by our extensive collection of White Papers and Quick Takes, the good news is that this has many of the highest quality stocks trading at discounts to the market.

For a list of stocks that analysts LOATHE and we LOVE due to their high profits and reasonable prices please login or subscribe to see directly below.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

[1] Huge hat tip to our head of data analytics, “NP” for getting this data set cleaned up and stabilized – terrific addition to our toolbox

[2] As of October 21st, Twilio has 30 analysts covering it, 28 have the stock rated a BUY, 2 have it rated a HOLD and there are zero SELLS.  Twilio generates just over $2bn in sales, -$700ml in losses and is valued at $60 billion dollars.


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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October 22, 2021 |

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