Are analysts always right? Should savvy investors take their recommendations as dogma, or should they search for top stocks among their sell recommendations?
Analysts do have an edge over the rest of us in making short-term earnings estimates…and not much else. They are closer to firm management than the rest of us, but their recommendations should not be dogmatically followed.
The following stocks are analyst sell recommendations that pay dividend yields that exceed the 10-year treasury yield and also exceed the dividend yield of the S&P 500 (SPY). Their details follow:
10-Year Avg ROE
Oil & Gas Refining & Marketing
Oxford Resource Partners
Industrial Metals & Minerals
Piedmont Natural Gas Co.
Terra Nitrogen Company
Whiting USA Trust
Oil & Gas Drilling & Exploration
These TNH and WHX are all categorized as "safe" according to the Altman Z-score, indicating that they are not considered alarming bankruptcy risks. FGP, MGEE, OXF, and PNY are categorized as "grey zone" or safe by this metric. Thus, analysts have cause for being bearish on these four stocks.
What about valuation and dividend stability? Consider the following table:
EPS growth past 5 years
EPS growth next 5 years
Trailing losses for FGP and OXF make computing price-to-earnings ratios or payout ratios meaningless. The remaining stocks with positive earnings are not much better since their high payout ratios should concern investors. Lower ratios show that payments are sustainable and that increases in dividend payouts are possible in the future. Payout ratios in excess of one-times earnings are not sustainable and payout ratios above 0.60 are generally considered high. The dividend policies of these firms are not a source of relief for jittery investors.
Furthermore, none of these stocks are exciting on the basis of growth or valuation. The low PE multiple of WHX is offset by its high price-to-sales multiple. Moreover, none of these firms has double-digit earnings growth forecast by analysts.
The analysts win this round of scrutiny for not recommending these stocks as "buys." Though these stocks have good long-term track records of growing shareholder equity, fragile dividend policies and the absence of compelling growth or valuation is consistent with analyst "sell" recommendations.
Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing. Moreover, this research does NOT constitute a guarantee.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.