By Philip van Doorn
If you were asked which stock market sector was the favorite among analysts who work for Wall Street brokerage firms, you would most likely say “tech.” And you would be right. But you might be surprised that the industrial and materials sectors are also heavily favored.
Below are lists of analysts’ favorite stocks within the sectors they like best.
Ratings from the top down
Here’s a breakdown of sentiment among analysts polled by FactSet for ratings among the 11 sectors of the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.11% :
|S&P 500 sector||Share “buy” ratings||Share “buy” ratings – June 30, 2020||Share “buy” ratings – Dec. 31, 2019|
|Full S&P 500||57%||53%||51%|
Analysts working for brokerage firms lean positive in their ratings, and they certainly shy away from “sell” or equivalent ratings. In fact, only one company among the S&P 500 has majority “sell” ratings: Lumen Technologies Inc. /zigman2/quotes/200067545/composite LUMN -0.16% , the former CenturyLink, which is rated a “sell” or the equivalent by seven of 16 analysts polled by FactSet.
The table, above, compares the current ratings breakdown with those from the end of June 2020 (after the S&P 500 had recovered from the worst of its pandemic decline) and the pre-pandemic ratings at the end of 2019. You can see that for the six sectors with majority current “buy” ratings, enthusiasm has increased since 2019 for all except real estate. The materials sector has had the greatest improvement in sentiment, but the improvements have been significant for the IT, industrial, health care and financial sectors as well.
Sentiment is higher even though the index’s forward price-to-earnings ratio has increased to 21.5 from 18.4 at the end of 2019. Unprecedented federal stimulus, the excitement of a new period for economic growth, the increase in the money supply springing from the Federal Reserve’s bond purchases, and negative long-term interest rates in Europe and Japan have all made the U.S. stock market an attractive home for investors’ cash.
Favorite stocks in favored sectors
Wall Street analysts set 12-month price targets. One year isn’t necessarily a long enough period for a serious, committed investor looking to gain as a company compounds earnings and cash flow.
Some companies with high percentages of “buy” ratings have share prices that are close to the price targets. One might call those “fully valued.” Then again, the 12-month price target may be too short for you. This is one of many reasons why it is important to do your own research and form your own opinion about a company’s ability to remain competitive for the next decade at least, before buying individual stocks for long-term investments.
The following are lists for the six favored sectors of the S&P 500. For each sector, the top five companies, by percentage of analysts rating the shares a “buy” or the equivalent, are listed. Or six in the event of a tie.
Information technology sector
Here are the six stocks in the S&P 500 information technology sector with the highest percentages of “buy” or equivalent ratings among analysts polled by FactSet:
Microsoft Corp. /zigman2/quotes/207732364/composite MSFT -0.51% has the highest percentage of “buy” ratings in the tech sector, and the analysts see 16% upside for the shares over the next year.
The listed stock with the most upside potential over the next year, according to the analysts, is ServiceNow Inc. /zigman2/quotes/202729495/composite NOW +0.05% , which gets the “buy” nod from 91% of analysts.
Next is Visa Inc. /zigman2/quotes/203660239/composite V +0.43% , with 87% “buy” or equivalent ratings. Its card payment-processing rival Mastercard Inc. /zigman2/quotes/207581792/composite MA +0.69% is rated a “buy” by 84% of analysts, so it just missed the list.