American Airlines was hit hard as the pandemic devastated the travel industry.
Joe Raedle/Getty Images
Investing in the best-loved stocks can be a good idea. But investors should also know what stocks analysts are shunning.
While simply avoiding those companies is one sound strategy, it can also make sense to dig through the reject bin. Sometimes the only direction to go from the bottom is up. The most hated stocks can only get less hated over time, a fact that on its own can be enough for above-average stock gains.
Wall Street ratings are always a helpful guide for investors—the pros as well as amateur stock pickers. Analysts covering companies at brokerage firms are, after all, paid to follow industry trends, compare companies, and value stocks.
Over the past year, analysts’ favorite 10% of S&P 500 stocks are up almost 70% on average. The bottom 10%, on the other hand, is up closer to 50%. Favorites have outperformed by about 20 percentage points. The overall S&P index, meanwhile, is up about 48%.
It might seem odd that the average gain for a hated stock in the S&P 500 is 2 percentage points better than what the index achieved over the past year. The reason is that the S&P 500 is weighted according to market capitalization, so moves in bigger companies’ stocks have more impact on the overall benchmark. Not adjusting for market capitalization, the average gain for an S&P 500 stock is about 63%.
That fits with the common-sense view that avoiding the dregs is a good idea. But this past year was difficult. During the first several months of the pandemic, it paid to invest in large, high-quality stocks. It will surprise no one to learn that Microsoft (ticker: MSFT), Google parent Alphabet (GOOGL), Amazon.com (AMZN) and Apple (AAPL) are all well liked by the Street.
Now, the tide is turning and the economy is growing again. That could be a signal to look at stocks that have had a harder time.
Barron’s came up with a list of the least-liked stocks on the Street by weighting the Buy, Hold, and Sell calls on each company to arrive at a single number summarizing overall sentiment. We took the percentage of ratings for a stock that are Buys, subtracted the share that are Sells, and then added the percentage at Hold, counting each as one-fourth of a Buy to reflect the fact that most analysts expect Hold-rated stocks to keep pace with their peers.
In the S&P 500, about 56% of ratings are Buys. 36% are Holds and 7% are Sells. The numbers don’t total 100 due to rounding.
Taking all that into consideration, the 24 lowest-rated S&P stocks—the ones analysts tell their clients to avoid—are as follows: American Airlines Group (AAL), Lumen Technologies (LUMN), Consolidated Edison (ED), Franklin Resources (BEN). Brown-Forman (BF. B), Mettler-Toledo International (MTD), Expeditors International of Washington (EXPD), Waters (WAT), Hormel Foods (HRL), McCormick (MKC), ViacomCBS (VIAC), Unum Group (UNM), Comerica (CMA) Under Armour (UAA), J.M. Smucker (SJM), Western Union (WU), Robert Half International (RHI), Discovery (DISCA), Varian Medical Systems (VAR), Invesco (IVZ), Walgreens Boots Alliance (WBA), Cincinnati Financial (CINF), Genuine Parts (GPC) and WEC Energy Group (WEC).
The Dirty Two Dozen
The 24 lowest-rated stocks in the S&P 500, calculated using a weighted score for Buy, Sell, and Hold ratings.
*Lower scores have more sell ratings.
Sources: Bloomberg; Barron’s calculations
It’s an eclectic list. Some stocks, such as American Airlines, are there because of huge, pandemic-induced losses. Others simply look expensive. Mettler, for instance, trades at 41 times the per-share earnings expected for 2021.
Others firms face potentially damaging long-term changes in their industries. Franklin Resources, for instance, is an asset manager dealing with the shift from actively managed funds to index funds with lower fees. And some companies just don’t seem to have much room for growth. McCormick sells spices, and the chances that demand will rocket higher unexpectedly appear slim.
Not every one of the hated names will pass muster for investors. But the hated stocks have one thing going for them: They are cheaper. Although not every one of the two dozen is making money, the shares trade for an average of about 20 times estimated 2021 earnings, while the market is at closer to 24 times.
Another plus is that unlike the S&P 500, the rejects aren’t trading near their record highs, a factor that points at the potential for a rebound. The two dozen are down by an average of roughly 25% from their all-time highs.
The bottom line, then, is that bargains may be hiding in the trash heap. But as is the case with any stock screen, investors will have to dig deeper to find out which.
Go to it, contrarians.
Write to Al Root at [email protected]
