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John Dorfman writes a syndicated column that appears weekly in the Omaha World Herald, the Pittsburgh Tribune Review and the web site Guru Focus. In it, he tries to provide original, profitable stock ideas for readers. In contrast to almost all other investment columnists, he systematically reports on past results, both good and bad.

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Wall Street Analysts’ Favorites Fizzled in 2017

John Dorfman

It’s okay if you want your daughter to marry a Wall Street analyst. Just don’t let one pick your stocks for you.

A study I’ve been conducting since 1998 suggests as much. Each January, I look at the four stocks analysts most adore, and the four they most despise.

The adored stocks have failed to beat the market (as measured by the Standard & Poor’s 500 Index) in 13 of the 19 years I’ve been doing the study. (I took a time-out in 2008, when I had temporarily retired as a columnist.)

The most beloved stocks have averaged an 8.9% one-year return. The hated stocks have averaged 7.6%. And the S&P 500 Index has averaged an 11.9% return. All figures are total returns including dividends.

Analysts’ favorites have managed to beat their most scorned stocks in 10 of the 19 years. The despised stocks have won eight times, and there was one tie.

There’s a lesson here. Analysts work long hours, have the latest tools, are smart, and often went to Harvard or Yale. But they can’t predict the future because no one can.

2017 Results

Last year, the analysts’ favorites eked out a 2.2% return from January 10, 2017 through January 5, 2018. By contrast, the S&P 500 rose 23.3%.

The big problem was with analysts’ third-favorite stock, Envision Healthcare Corp. (EVHC).  It dropped 46% even though at the start of the year, 13 analysts had “buy” ratings on it, with no “holds” or “sells.”

Envision runs selected departments within hospitals and surgery centers. Earnings were weak all year. Private-equity firms were sniffing around for a possible takeover, but their interest didn’t help the stock price.

The number-two stock, Incyte Corp. (INCY), a Delaware company that was working on several cancer drugs, also fell, losing 16%.

The Wall Street crowd’s other two favorites did fine. Alphabet Inc. (GOOG), the parent to Google, rose 37% and LKQ Corp. (LKQ), which distributes auto parts, rose 34%.

The despised stocks fell 5.01% as a group. Wesco Aircraft Holdings Inc. (WAIR) and Owens & Minor Inc. (OMI) dropped badly. Heartland Express Inc. (HTLD) was up moderately. Credit Acceptance Corp. (CACC), the most-despised stock, advanced 57%.

At the beginning of 2017, eight analysts out of 12 rated Credit Acceptance a “sell.”

Adored

Which stocks are the analytical corps sweetest on now?

Antero Midstream Partners LP (AM), of Denver, Colorado, ranks first, with 17 “buy” ratings and no dissenting votes. It contains pipeline operations spun off in 2014 by Antero Resources, a natural-gas producer. It pays a nice dividend but seems expensive to me at 7.7 times revenue.

Viper Energy Partners LP (VNOM), unanimously recommended by 14 analysts, is also a 2014 energy spinoff. It came out of Diamondback Energy, which still owns 64% of it. Revenue for 2018 is estimated at $224 million but the stock market pins a $2.66 billion market value on the company. That seems stretched.

Equally popular, with 14 “buy” ratings and no dissents, is Sage Therapeutics Inc. (SAGE). The company says it “develops treatments for nervous-system disorders” including schizophrenia, manic depression, pain and traumatic brain injury. That sounds great but Sage had no revenue last year

Also enjoying unanimous approbation with 14 “buy” ratings is Evolent Health Inc. (EVH). It makes software to measure health outcomes and reward healthcare providers for good outcomes. There are no earnings yet, but revenue is substantial and the stock looks reasonably priced to me.

Despised

Analysts have the most scorn for World Acceptance Corp (WRLD), a Greenville, South Carolina, company that makes small loans at high interest rates to consumers with bad credit. Only four analysts cover the company, which garners three “sell” ratings and one “hold.”

One worry for World Acceptance is the possibility of tighter regulation on such loans – even though the Trump administration generally favors looser regulation.

Deeply unpopular, too, is Dillard’s Inc. (DDS), a department store chain with headquarters in Little Rock, Arkansas. The stock has already descended from $125 at the end of 2014 to about $58 now. It has two “hold” ratings and three “sells.”

Internet competition has wounded Dillard, as has the long-term decline of department stores, But I think Dillard’s might surprise on the upside. It is selling near book value (corporate net worth per share).

Equally unloved is Northwestern Corp. (NWE), a utility serving parts of Montana, South Dakota and Nebraska.

Completing the scorned quartet is Intrepid Potash Inc. (IPI). The fertilizer maker has two “hold” ratings and three “sell” ratings, reflecting three years of declining sales and earnings. Still, analysts expect modest improvement this year and next.

Disclosure: I own Alphabet personally and for most of my clients.

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