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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 (NYSEARCA:SPY). Their details follow:

Ticker

Company

Industry

10-Year Avg ROE

Altman Z-score

FGP

Ferrellgas Partners

Oil & Gas Refining & Marketing

39.8%

2.17

MGEE

MGE Energy

Diversified Utilities

11.7%

1.39

OXF

Oxford Resource Partners

Industrial Metals & Minerals

2.5%

1.84

PNY

Piedmont Natural Gas Co.

Gas Utilities

12.3%

1.19

TNH

Terra Nitrogen Company

Agricultural Chemicals

44.6%

63.42

WHX

Whiting USA Trust

Oil & Gas Drilling & Exploration

13.1%

1329.85

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:

Ticker

P/E

P/S

EPS growth past 5 years

EPS growth next 5 years

Div Yield

Payout Ratio

FGP

0

0.5

-15.3%

4.0%

12.4%

N/A

MGEE

17.62

1.96

5.0%

4.0%

3.4%

0.59

OXF

0

0.39

0.0%

4.0%

22.9%

N/A

PNY

21.02

1.75

4.3%

4.6%

3.9%

0.79

TNH

13.25

4.75

44.3%

N/A

8.3%

1.10

WHX

5.71

5.59

-11.2%

N/A

17.4%

1.00

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.

Source: Dividend Companies Analysts Hate