Insights and Thoughts from Dorfman Value Investments
John Dorfman writes a syndicated column that appears weekly in Forbes.com, GuruFocus.com, Ohio.com, the Omaha World Herald, the Pittsburgh Tribune Review and the Virginian Pilot. 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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All Four of Analysts’ Favorite Stocks Fell Last Year
Posted: January 14, 2020
The four stocks that Wall Street analysts most adored a year ago all fell.
The analysts’ darlings as of January 2019 posted a 15% loss from January 14, 2019 through January 10, 2020. This happened even as the Standard & Poor’s 500 Index, widely used as a gauge of the U.S. stock market, rose 26%.
What about the four stocks that analysts despised the most a year ago? They fell 9%, but that was a milder loss than the favorites experienced.
Abiomed (ABMD) was the biggest disappointment among the analysts’ darlings, falling 40%. Viper Energy Partners LP (VNOM) dropped 10%, while Marathon Petroleum (MPC) and Camping World Holdings (CWH) had single-digit losses.
Among the hated stocks, American States Water Co. (AWR) posted a 31% gain. But World Acceptance (WRLD), Franklin Resources (BEN) and Tanger Factory Outlet Centers (SKT) had losses ranging from 18% to 27%.
The analysts’ poor showing was not as strange as you might think. For two decades, I’ve been tracking the performance of the four U.S. stocks that Wall Street analysts love the most, and those they despise.
I’ve done this each January from 1998 to the present, with the exception of 2008, when I was temporarily retired as a columnist. In 21 years, the analysts’ adored stocks have averaged an 8.85% return. The despised stocks averaged 6.78%. Both trailed far behind the S&P 500, at 11.74%. The analysts’ darlings have trailed the S&P 500 14 times out of 21, and lost to the despised stocks nine times.
How can this be? Wall Street analysts are intelligent and hard-working. They have fast computers and good-looking assistants who recently graduated from Harvard or Yale. The short answer is that human beings just can’t predict the future. Another answer lies in the efficient-market theory, which postulates that all information is quickly factored into stock prices, making it hard to beat the market.
My own theory is that analysts focus too much on the recent past, and put too much emphasis on operating results and not enough on stocks’ valuations.
So, what do the analysts love and hate now?
As we cruise into 2020, Viper Energy Partners is their top favorite. It garners 15 “buy” ratings, with no “hold” or “sell” recommendations, according to Zacks Investment Research. You can see why Wall Street likes Viper. During the slump in the energy industry, now five and half years old, it has stayed profitable except for a small loss in 2016. I disagree with the analysts’ verdict on Viper, however. Its profits remain modest, and the stock sells for more than five times the company’s revenue.
Enterprise Products Partners LP (EPD) has withstood the energy debacle without ever dipping into the red. The pipeline company has 13 fans and no dissenters. I agree with the analysts in liking this stock, but there is a danger point. The dividend, now a hefty 6.16%, may need to be cut, as Enterprise is paying out 80% of its profits in dividends.
Exact Sciences (EXAS) makes medical diagnostic products, including the Cologuard system, a non-invasive way of screening for colon cancer. I like the niche, but this company has 15 consecutive years of losses. Thirteen analysts unanimously call it a buy.
Twelve analysts recommend Centene (CNC), again with no dissents. The company, based in St. Louis, Missouri, offers healthcare plans mainly to Medicare and Medicaid members.
Among the four despised stocks, there are two I think may exceed prevailing expectations.
News Corp. (NWSA), the print division of Rupert Murdoch’s old media empire, owns the Wall Street Journal and other properties in the U.S., Britain and Australia. Three of four analysts call it a “sell.” As a former Wall Street Journal reporter, I’m prejudiced, but I think this stock will do okay.
Four out of five analysts slap a “sell” rating on Waddell & Reed Financial (WDR). The money management firm, based in Overland Park, Kansas, has suffered as investors have flocked to index funds and growth stocks outperformed value stocks. I think those trends will reverse someday, perhaps this year.
The other two despised stocks I hold no brief for. All four analysts who cover Avista (AVA) rate it a sell. It’s a utility company selling electricity and natural gas in the Spokane, Washington, area.
Stratasys Ltd. (SSYS) of Eden Prairie, Minnesota, is in the 3-D printing business. It is struggling to achieve profitability, and three analysts out of four call it a “sell.”
Disclosure: I have no positions in the stocks discussed in today’s column, personally or for clients.
John Dorfman is chairman of Dorfman Value Investments LLC. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.