Most-Loved & Hated Stocks – Analysts On The Money With Their Top Picks For 2015 by John Dorfman, Dorfman Value Investments
The stock market went nowhere in 2015, but Wall Street analysts’ top picks had an excellent year.
The analysts’ four top choices beat the Standard & Poor’s 500 soundly for a third year in a row. That had never happened in the 17 years I have been studying the performance of the stocks that analysts most love, and those they despise.
The stocks the Wall Street corps adored at the beginning of 2015 rose more than 32 percent from Jan. 13, 2015, through Jan. 8, 2016. Activision Blizzard Inc. (ATVI), a video game company, led the parade with a gain of 94 percent. Omnicare Inc. rose 34 percent as it was acquired by CVS. The other two analysts’ favorites, Towers Watson & Co. (now Willis Towers Watson, WLTW) and KAR Auction Services Inc. (KAR) were near flat.
Charlie Munger: Invert And Use “Disconfirming Evidence”
Meanwhile, the stocks analysts hated at the start of 2015 plunged as predicted. Rayonier Advanced Materials (RYAM) plummeted 60 percent, California Resources Corp. (CRC) was down 56 percent, Exco Resources Inc. (XCO) dropped 29 percent, and Lexmark International Inc. (LXK) fell 27 percent.
All figures are total returns including reinvested dividends.
For more than a decade and a half, I have tracked the performance of the four stocks analysts most unanimously recommend at the beginning of each year and the four stocks they most despise (as measured by the percentage of sell recommendations). To be tracked, a stock must be followed by at least four analysts. My articles began in 1998 and covered every subsequent year except 2008.
For years, I enjoyed making fun of the analysts because the average performance of their most-hated stocks slightly exceeded that of their most-beloved. But I can no longer do that.
The analysts’ darlings have raised their average annual return up to 9.1 percent. By contrast, the average return on their despised stocks is 3.07 percent. The loved stocks have beaten the hated stocks 10 times, lost to the hated stocks seven times and tied once.
Neither group has outperformed the Standard & Poor’s 500 Total Return Index, which is up an average of 10.7 percent.
The most loved stock as of early January is Ally Financial Inc. (ALLY), with 17 buy recommendations and no “sell” or “hold” recommendations. This is the successor corporation to General Motors Acceptance Corp., which was bailed out by the federal government in the financial crisis of 2008-2009. It will report its fourth consecutive annual profit this year.
Next most loved is Delta Air Lines Inc. (DAL), scoring 15 “buy” ratings and no dissenting votes. I agree with the analysts on this one. Delta sells for 13 times recent earnings and only seven times this year’s expected earnings. A series of mergers have helped airline profits because planes are flying fuller, and low oil prices are doing wonders in cutting airlines’ costs for jet fuel.
Tied for third in the love fest is Sabre Corp. (SABR) of Southlake, Texas, which runs an online airline ticket booking and travel service. After four years of losses, Sabre showed a small profit in 2014 and will show a much bigger one this year. It garners 12 “buy” ratings with no dissents, but the stock is on the expensive side according to my measures.
Tied with Sabre is LKQ Corp. (LKQ) of Chicago, a distributor and retailer of replacement auto parts. During the past 10 years, it has shown excellent revenue and earnings growth. Valuations are higher than I prefer but not exorbitant.
The most despised stock on Wall Street, with four “sell” ratings among seven analysts, is MannKind Corp (MNKD). This is a small biotech company from Valencia, Calif., whose main product is insulin in inhalable (as opposed to injectable) form. The stock has withered to about 66 cents a share from more than $20 in 2006. This month, the company lost its distribution arrangement with Sanofi, a large drug company.
Next most reviled is Walter Investment Management Corp. (WAC), with four “sells” among nine analysts. The Tampa company originates and services residential mortgage loans. It has high debt and has been sustaining losses.
Third on the not-welcome list is Peabody Energy Corp. (BTU), a major coal producer with headquarters in St. Louis. Five of the 15 analysts who follow it rate it a “sell.” It has had a precipitous decline from well over $1,000 a share in 2008 to about $6.67 now. It has posted losses in the past three years and is expected to post a wider loss this year.
Rounding out the despised brigade is Cliffs Natural Resources Inc. (CLF), an iron ore producer from Cleveland. Cliffs has plunged to $1.66 from more than $100 a share in 2008.
Disclosures: I own shares of Delta Air Lines for most of my clients. I own Cliffs Natural Resources bonds for one client. A close friend of mine owns shares in MannKind.