NEW YORK (CNN/Money) - Investment demi-gods such as Benjamin Graham and Warren Buffett made fortunes and reputations buying under-priced stocks on the way up -- a simple approach, but a tricky one to pull off in today's market, where good bargains are hard to find, according to many analysts.
One place to look for the kind of bargain that might make a Graham or a Buffett salivate could be those shares shunned by Wall Street analysts, slapped with dreaded "sell" or "underperform" labels, according to a recent research note by Bear Stearns strategists.
Let's call these stocks, for lack of anything more dignified, Misfit Stocks.
According to Bear Stearns, such stocks that have shown recent signs of improvement could be poised for big price gains. Conversely, good companies that every analyst loves could have strong business fundamentals but still bring anemic returns, precisely because everybody already loves them.
"A simple way to avoid companies with great prospects but little upside price potential would be to avoid those with extremely favorable mean ratings," strategists Francois Trahan, Kurt Walters and Caroline Portny wrote. "In that vein, investors focusing on those companies with unfavorable mean ratings and, of course, prospects for a turn in business fundamentals can sometimes be rewarded quite handsomely."
In their note, the strategists claimed that, since 1997, stocks with improving mean analyst ratings have gained 19 percent, while stocks with declining mean analyst ratings have gained just 8.2 percent.
Trahan & Co. also helpfully provided a list of shares matching both descriptions.
Among Bear Stearns' 13 under-loved but recently improving stocks are several non-cyclical sectors -- stocks that can usually ignore an economic slowdown -- including utilities Consolidated Edison, Duke Energy and TECO Energy; insurance companies Jefferson-Pilot and The Progressive Corp.; and energy companies Amerada Hess and Sunoco.
There are also a few cyclical plays, including chipmaker Applied Micro Circuits, camera maker Eastman Kodak and electronics retailers Circuit City and RadioShack.
The other two stocks on Bear Stearns' list are telecom services firm and Dow component SBC Communications and bank BB&T.
The strategists listed 19 companies with slumping analyst ratings, including drugmaker and Dow component Pfizer, biotech developer Amgen, media firms Comcast and Clear Channel, manufacturing conglomerate Tyco, communications equipment maker Motorola, and sportswear icon Nike.
Good luck finding a pattern in this alphabet soup of ticker symbols. And Bear Stearns' analysts weren't exactly proclaiming they'd found a sure-fire way to make (or lose) money.
Instead, they called the list of beaten-down but improving stocks "a contrarian's list of potential investment ideas" and the list of stocks falling out of favor "names to consider when searching for stocks to divest from one's portfolio."
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