Among the small>, midsized and large companies in the S&P Composite 1500 index, "buy" recommendations by Wall Street analysts outnumber "sell" recommendations 8 to 1. It's not because analysts are naturally chipper, nor does it necessarily mean they're disingenuous. Most likely, their firms are simply catering to their retail investors, most of whom look for things to buy, not bet against.
Fresh "buy" recommendations tend to drive share prices higher, studies show. Stocks with limited analyst coverage today -- but with recent signs of financial momentum -- might attract more coverage in the near future. And because that coverage is more likely to be positive than negative, shareholders of such companies stand to gain from the publicity.
The average S&P 1500 company is covered by 15 analysts. The three listed below are covered by three or fewer. Each has shares that have gained more than 20% over the past year but remain attractively priced relative to profits, and each produces strong returns on its invested capital, increasing the likelihood that more analysts will soon take notice.
Rudolph Technologies (RTEC) makes systems that measure semiconductors and examine them for defects. Such yield-improvement equipment has become increasingly important to chipmakers as device sizes have fallen. Last year, the company swung to a profit as sales more than doubled. Management said it gained market share in all product lines and that demand for smartphones spurred its growth. This year, analysts expect 12% sales growth to lead to a 21% earnings increase. Shares sell for 10 times earnings. The company is debt-free and holds cash equal to more than one-fifth of its stock market value.
Progress Software (PRGS) makes programs used for tasks as diverse as algorithmic trading, flight control and oilfield monitoring. It's a tiny company with sales of just over $500 million over the past year, versus about $32 billion for Oracle (ORCL), but Progress has been profitable for 25 years. Management spent the past year shuffling its sales force and now wants to sell broader software suites to increase the average size of its deals. It's making modest progress: Average deal size during the company's most recent quarter rose to $345,000 from $300,000 a year ago. Wall Street expects earnings per share to climb 11% this year on 6% sales growth. Progress has a cash hoard equal to more than 15% of its stock market value.
Greenville, S.C.-based World Acceptance (WRLD) makes small loans at high interest to people who don't have access to bank loans. Its average loan amount is just over $1,000 in the U.S. and about half that in Mexico. Credit losses have ranged from 13.3% to 16.7% of receivables since 2002. Nonetheless, the company managed to bring in $309 million of interest and fees over the first three quarters of its current fiscal year, with an average of just $851 million in gross loans receivable. Management is quickly adding new offices, typically in rural strip malls, where rents average just $1,350 a month. Workers, an average of just over three per store, make $25,000 a year. That makes it easy to turn a handsome profit on even the tiniest of loan portfolios; receivables average less than $1 million per office. Earnings per share for the current fiscal year, which ends Thursday, are expected to rise 29%. Shares sell for 12 times earnings.