In theory, Wall Street analysts are paid to predict the future earnings of the companies they cover and use those predictions as the basis for their stock recommendations. In reality, this is not always how the game works. Often, analysts seem to forget that earnings and earnings growth have always been the mother’s milk of stock prices over the long term. Instead, they focus on short term price fluctuations, lowering ratings when a company’s stock drops, even as its earnings estimates rise.
Make no mistake, as I’ve repeatedly warned, most stocks making the 52-week low list are there for good reason. The large majority of them are heading lower, and many will cease to exist. Conversely, most stocks making 52-week highs are likely headed higher. However, profitable exceptions to these rules do exist. With a little digging, investors can exploit the imbalance between the Street’s short-term perception of a company, as reflected in its stock price, and its long-term prospects, as reflected by its earnings outlook.