Street picks: 10 stocks ready to drop
A small number of stocks in the S & P 500 could be due for a pullback as investors may have become overly bullish in some of these names. Recent figures show that about 3 percent of the S & P 500 components deviated from the rest of the benchmark based on where analysts believe these stocks should be trading. They could be the first to drop if the stock market is deemed overvalued in the short term. "We do believe the market appears expensive in multiple fronts," said Jack Ablin, chief investment officer at BMO's Private Bank. He thinks there's more "downside risk than upside potential" due to steady downward revisions of estimates ahead of the first-quarter earnings season, which is set to roll out in the next two weeks. As shareholders brace for what could be a bleak quarter, CNBC Pro screened for stocks in the S & P that could be due for a drop based on where they trade compared to the consensus 12-month price target set by analysts and tracked by FactSet. Investors often look for large deviations in the market versus the Street's outlook as opportunities either to buy or sell with the assumption that equities or other asset classes tend to return to their mean value. Read More Merger Monday is back. What to buy Most of the companies that made the list belong to the health care, consumer discretionary and tech sectors, which have led the recent bull advance. This year, health-care stocks rallied 8 percent, boosted by demand for biotech and health-management companies. That compares to a 1 percent increase for the S & P over the same period. But as some of these stocks trade higher, analysts on the street flag to a potential pause or drop in the shares. Consider Coach , for example, whose stock is up 27 percent from its low in November, while analysts rate the stock a "hold." "In my opinion, much of the recent move [in ticker 'COH'] is due to takeover speculation; a short squeeze; and technical indicators, as opposed to investors that see value here," wrote Ronnie Moas, director of research at Standpoint Research. He recommends selling the stock into strength, and believes there's a "good chance that a market correction and/or slip by Coach" in 2015-16 will provide a better entry point in the mid-$30s. Paychex is another name that appears ripe for a pullback. "We maintain our thesis that PAYX is susceptible to diminished pricing power as a result of a largely saturated end market and increased competition from established and newer players in the small business payroll/HRS outsourcing space," warned analysts at Jefferies. They think the valuations for ticker 'PAYX' (trading at 24.5x C16 EPS) are "overextended." In fact, investors seem to agree with analysts' projections that some of these stocks are due for a drop. Among the names CNBC Pro identified as overvalued, Transocean , VeriSign , Quest Diagnostics , People's United Financial , Coach and Campbell Soup , all have short interest ratios of at least 8 percent of float. Transocean is the most shorted stock of the group, with a third of its float sold short. Shares of the offshore drilling company are down 65 percent in the past year, but analysts believe the stock could go even lower as refinancing becomes more difficult due to below-par investment grade credits.

Adam Jeffery | CNBC