January 30, 2013
Stock market bulls have been stampeding ahead. They’ve powered the Standard & Poor’s 500-stock index to a five-year high above 1,500 and have the Dow Jones industrial average flirting with 14,000, just 1.5 percent off its all-time record close.
The positive sentiment has washed across a wide range of stocks – the Russell 2000 small-cap index is also at an all-time high – but it doesn’t quite extend to all corners of the market, though. Among the Dow 30 stocks, Boeing and Bank of America are still in the red for the year, for example. And while Wall Street analysts, especially those on the “sell side,” may be known for their bullish bent, there’s a short list of stocks that they are largely shunning.
To find those stocks that aren’t feeling the love, we used data on analyst ratings from Thomson Reuters StarMine. With the help of John Kozey, senior analyst for Intelligent Analytics at Thomson Reuters, we screened for companies with predominantly negative analyst ratings. We limited our list to companies with market caps above $1.5 billion. To weed out lightly followed companies, we looked for stocks being tracked by at least four analysts. See the five stocks with the worst ratings from analysts below.
One important note about this roster of analyst rejects: Just because the pros don’t like them doesn’t mean the market will agree. As you'll see, some of the stocks analysts hate have fared well, sometimes remarkably so.
John Dorfman, chairman of Thuderstorm Capital in Boston and a financial columnist, has been tracking analysts’ four most-loved and hated stocks at the beginning of each year since 1998, with the exception of 2008. He found that analysts’ track records are mixed at best. Over the 14 years covered, the hated stocks have done better than the loved ones seven times, while the loved have beaten the hated six times. There was one tie.
"That suggests that choosing the most hated is not a great strategy, but it's better than choosing the most loved, which is a really terrible strategy," Dorfman says.
Analysts did hit the mark last year – sort of. Their four top-rated stocks at the beginning of 2012 – Polaris Industries, Tesoro Logistics, Micros Systems and LogMeIn Inc, according to Dorfman – delivered a 10.4 percent total return, beating the worst-rated stocks by more than seven percentage points over the year. Even so, investors would have been better off simply putting their money in an index fund investing in the S&P 500, which produced a total return of 16 percent.
Over the long run, analysts’ top picks have fared even worse, Dorfman found. They’ve gained an average of 0.15 percent over the 14 years Dorfman examined, compared to a gain of 6.12 percent for the worst-rated stocks. The average gain for the S&P 500 overall was 10.2 percent.
"It's not a huge amount of data," Dorfman admits, but it clearly suggests that when analysts exhibit what he calls “herding behavior” they’re often wrong – or it may simply be too late to follow their recommendations. That’s probably advice worth remembering any time the bulls or bears dominate for an extended run.
Sears Holdings Corp (NASDAQ: SHLD)
Market Cap: $5.1 billion
1-Year Return: 7.56 Percent
Billionaire Eddie Lampert, the chairman and newly installed CEO of Sears Holdings, bought some 322,000 more shares in his company in early January, bringing his total to more than 23.8 million. Analysts, however, aren’t buying that the parent of Sears and Kmart is a bargain, with three “Sell” ratings and one “Hold,” according to StarMine. The stock has made Dorfman’s most-hated list for three years in a row, but posted a 45 percent gain in 2012.
The Buckle, Inc. (NYSE: BKE)
Market Cap: $2.25 billion
1-Year Return: 7.94 Percent
This Nebraska-based casual-clothing and accessories retailer runs 431 stores across 41 U.S. states. The stock reached an all-time high above $51 a share in late November before paying out a special cash dividend of $4.50 a share the following month, but it has fallen out of fashion with analysts, who now have five “Hold” recommendations, three “Sells” and one “Strong Sell,” according to StarMine.
Owens & Minor Inc. (NYSE: OMI)
Market Cap: $1.96 billion
1-Year Return: 2.01 Percent
Owens & Minor distributes medical supplies such as disposable gloves, syringes and surgical gowns. Its stock has had a healthy run of late, climbing more than 10 percent over the last month. The company has paid a dividend every year since 1926 and has raised its payout for 15 years running. Shares now yield better than 2.8 percent, but analysts doubt the stock will be good medicine for a portfolio, awarding it three “Holds,” four “Sells” and one “Strong Sell,” according to StarMine.
Ferrellgas Partners (NYSE: FGP)
Market Cap: $1.54 billion
1-Year Return: 13.82 Percent
Ferrellgas bills itself as “the nation’s premiere propane provider,” but analysts don’t recommend looking to the company to fire up your portfolio. The stock was on Dorfman’s list for 2012 as well, and the six ratings in StarMine’s database now include five “Sells” and one “Strong Sell.”
Lexmark International (NYSE: LXK)
Market Cap: $1.52 billion
1-Year Return: -32.61 Percent
The writing for printer companies is on the wall, and it’s probably not from an inkjet. Lexmark has been suffering as the PC industry declines and consumers increasingly get their content on mobile devices. Lexmark last year decided to get out of the market for inkjet printers and focus on higher-margin software, services and laser printing. The company announced Tuesday that fourth-quarter earnings fell 91 percent from a year ago to $6.3 million. Revenues were stronger than expected, but the company warned that it expects sales to drop by 11 percent to 13 percent in the current quarter as a result of its leaving the inkjet business.