Don’t Listen To Wall Street

July 12, 2010 | By More

Can you believe how bad mainstream media can be?  It never ceases to amaze me…

Let me give you an example.  The other day I was sitting at my desk drinking a cup of coffee.  I was reading through the financial news like I always do.  I came across an article – and nearly spit my coffee on the computer screen.

The article was talking about this year’s best performing stocks.  But none of these stocks were picked by the Wall Street analysts to do well…

You’ll never guess what came next… the article actually predicts analysts will start recommending these companies!  It claims this will drive up their prices even higher.

I’m sure this article was supposed to be about compelling reasons to buy these outperforming companies.

All I kept thinking about was… are you kidding me?

What we need to do is flip this idea on its head.  What the article actually says is analysts only picked big losers!  Many of the top picks by the experts on Wall Street are underperforming expectations.

These analysts make their living telling you when to buy and sell.

There are a few problems with following advice from Wall Street analysts. First, analysts’ picks can move stock prices.  In general, this is a good thing… except we don’t know who they told first!  We could be coming very late to the party.  By the time you have a chance to buy these stocks, they’re no longer undervalued.

Second, greed steps in… meaning expectations can rise faster than the stock price.  Buyers might consider it a disappointment if a stock doesn’t shoot through the roof.  They might sell their shares and end up pushing the price even lower.  I’ve seen it time and time again.

Finally, analysts tend to ignore the smaller companies.  You may be missing out on great companies because they happen to be too small to be covered by Wall Street.

Fortunately, you don’t have to rely on analysts to find great stocks.

You don’t need hours of research or tons of money either.  Just a little homework will do.

One way I like to screen companies is by looking at dividend yield and revenue growth.

Companies with high dividend yields and growing revenues tend to outperform the overall market and provide steady returns in the long-term.

Think about it…

First off, big dividends are nice.  Who doesn’t want to get paid for owning a stock?  The average dividend yield on the S&P 500 is around 2% right now.  But you can get paid dividends of 5% or even 10%!

Secondly, dividends aren’t likely to get cancelled.  After all, management doesn’t want their company looking bad.

Another great benefit… there’s usually a floor on the price of the stock.  A company with a nice dividend is going to garner attention from lots of investors.  They’re going to gobble up shares of the companies with the big dividends.  This will eventually drive up the price.

It means if you get in early, you’ll be earning a big dividend.  Best of all, you might also grab a big increase in the share price.

Just look at SeaDrill Limited (SDRL).  It’s an off shore drilling company with equipment all over the world.  I found this company by looking at the dividend yield and revenue growth rate.  It’s trading just over $20 but has a dividend around $1.75.  That’s an 8% yield!

The share price traded at nearly $28 on April 26th but has dropped on the bad press from the BP oil spill.  I think the stock has a big upside.

See, SDRL has nothing to do with the Gulf disaster.  It’s being unfairly punished for the actions of another company.  Once drilling resumes in the Gulf, we should see offshore drilling companies regain some value and SDRL shares should jump in price.

More importantly, SeaDrill owns over 40 rigs… but actually only has one rig in the Gulf of Mexico!  Most of its equipment is near Norway or in Southeast Asia.

And… the company’s rig count is climbing.

Look, this is a strong company.  SDRL is fundamentally sound, but the markets don’t even know it.  Check its low P/E of 3.4x.  The company’s big competitors all have P/E ratios over 20x and 30x.  Talk about your misvalued stocks.

Also, SDRL is sitting on a cash hoard of over $1 billion.  The company can easily service its debt and pay its dividend even in the worst market conditions.

Now is a good time to consider this stock for your portfolio.  You won’t hear any Wall Street analysts recommending companies like SeaDrill.  But that’s good news – we actually want to make money on our investments!

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Category: Dividend Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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