Wall Street loves winners. They enjoy backing stocks that are rising and want to avoid stocks that are falling. Yet rarely do they place a sell rating on a stock.
Whether it is because stocks generally go up over time and a rising tide lifts all boats, or they don’t want to miss out on potential fees earned from dealing with a stock sale or other corporate transaction, investors are rarely told to sell any stocks. Out of the thousand of companies that trade on the NYSE or Nasdaq stock exchanges only a few dozen companies earn the distinction of having a sell rating.
That’s where being a contrarian investor can generate substantial wealth. By fishing in the shallow end of the pond, you can find stocks the market rejects. Trading at deeply discounted prices, you can discover contrarian stocks to buy and make a killing when the inevitable turnaround occurs. Below are three stocks Wall Street has turned its back on that still hold enormous potential for dramatic gains.
Palantir Technologies (PLTR)
Artificial intelligence (AI) pure-play Palantir Technologies (NYSE:PLTR) is a surprising pick for a stock analysts rate as a sell. Trading under $26 a share, Wall Street put a “reduce” rating on the stock. It’s one of those instances where analysts want to tread lightly and not outright say sell.
You might want to dive in head first. Make no mistake, the trepidation around Palantir Technologies is probably related to valuation. The stock isn’t cheap. It goes for 188 times earnings and 60 times next year’s estimates. The one year consensus price target on the AI stock is $21 a share.
Yet such bloated valuations can occur when a stock is newly profitable. Palantir Technologies only started reporting GAAP profits in late-2022 and has notched six consecutive quarters of being in the black. But having turned profitable, there is no expectation it will reverse course and report losses again.
Palantir Technologies launched its Artificial Intelligence Platform (AIP) last year and customers are flocking to it. AIP can integrate data from across organizations, analyze it and package the output into a visually useful product. By the end of 2023, more than 560 companies had signed on. This achieved for Palantir Technologies in one quarter what it thought would take at least a year to complete.
Not all analysts think investors should sell. Wedbush Securities analyst Dan Ives is the closest thing we have to a permabull on PLTR stock and he calls it the “Messi of AI,” referring to the soccer great. That may be some hyperbole, but it underscores the potential the company holds.
Archer-Daniels-Midland (ADM)
Similarly, grains and oilseed trader Archer-Daniels-Midland (NYSE:ADM) has also been labeled a “reduce” stock. Because it tends to be cyclical, Wall Street understands it will soon swing higher. Rating it a sell wouldn’t work for the investment banks.
And ADM is cheap. Unlike Palantir the agriculture stock goes for 10 times trailing earnings and estimates. Also, it trades at a fraction of its sales and a bargain-basement 5x the free cash flow (FCF) it produces. Analysts even have a target price implying 12% upside in Archer-Daniels-Midland stock.
So why the sell — er, reduce — rating? Commodity prices have plunged from their post-pandemic peak. Even though consumer prices remain elevated, they are well below their 40-year historical highs. A commodities stock amid sliding prices causes consternation amongst analysts.
Yet, the company is moving into new verticals to minimize the volatility in its stock. ADM is expanding its human, pet and animal nutrition business. After a series of mishaps at one of its plants that shut it for most of last year, the facility reopened. Therefore, Archer-Daniels-Midland should soon be swinging higher once more.
Solventum (SOLV)
The third contrarian stock to buy is Solventum (NYSE:SOLV), the healthcare business 3M (NYSE:MMM) recently spun off into a standalone company. It is one of the largest providers of sterilization devices, dressings, tapes and other consumables used by healthcare facilities.
Solventum had approximately $8.2 billion in 2023 sales and operates in four business segments. Those include medical surgical, dental solutions, health information systems and purification/filtration. Sales were up in the first quarter as its medical surgical business gained traction. Yet, the stock has lost half its value since being set free.
Undoubtedly the heavy debt 3M saddled Solventum with, some $8.3 billion, plays into Wall Street’s reduce rating. However, management says it is determined to pay that amount down over the next two years.
At just nine times earnings estimates, the stock is being discounted by the market. Even the consensus analyst price of almost $66 a share envisions 22% upside in the stock. Thus, investors will want to get in on this contrarian stock to buy before Wall Street wisens up.
On the date of publication, Rich Duprey held a LONG position in SOLV and MMM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.