Wall Street is a rigged game. And if you’re an individual investor with just a few thousand dollars at play, the quicker you learn this the better off you’ll be.
Right now we’re in the middle of earnings season, one of the biggest pieces of Wall Street theater, and lots of folks will be crowing about “beating expectations.” But consider that the majority of stocks in the S&P 500 index have beaten the Street every year since the third quarter of 1998. Particularly galling was that in Q3 of 2009, right after the market bottomed, nearly 80% of companies in the S&P topped forecasts.
See what I mean? Don’t tell me the analysts just happen to set the bar that low on accident.
Further proof: Factset reports that of the more than 10,500 ratings on S&P 500 stocks heading into 2012, 54% were buy ratings, 42% were holds — but just 4% were sell ratings. That’s right. According to the “experts,” you’re safe if you’re hanging on to 96% of equities out there. Wrap your head around that one.
I could rant for a while about the so-called “smart money” on Wall Street. But whining doesn’t change anything. So, so let’s talk about how you can find a way to count cards in this rigged game, and maybe make a few bucks in the process.
Here’s my tip: If 95 “experts” on Wall Street are saying to buy a stock and fiver are telling you to sell — those five folks probably represent a majority opinion. After all, sticking your neck out to make a crazy downside call is no way to make a living on Wall Street. The order of the day is always outrageous upside targets — like the $700 to $800 forecasts for Apple (NASDAQ:AAPL) over the last year or two from “top investment banks.”
If any of the cheerleading fat cats on Wall Street has given up, that’s a sure-fire sign that disaster is about to strike.
So what stocks are so awful that even buy-happy analysts have to admit that they’re doomed? Here are three in particular:
You may be shocked that such a powerful income investment like Eli Lilly (NYSE:LLY) would be on the sell list. Granted, Lilly boasts a nearly 5% yield.
Of course, shares are also off 30% since 2007. And more telling is that while the market has built a decent recovery since mid-2009, LLY has returned less than 3% annually since rebounding from its bear market lows. At the same time, the dividend has been frozen since 2009 at 49 cents a quarter without a single increase.
So what does Wall Street expect in the future? More of the same, it looks like. According to Factset research, 26% of analysts following the stock rate it a sell and only 16% rate it a buy. The most recent was MKM Partners, which initiated coverage on Dec. 20 at sell.
What’s more, out of 14 folks who set price targets on the stock, the highest of them all is $43 — a mere 7% up from here. The median target is $37.68, and the mean is $38 according to Thomson/First Call reports. The low target? That’s $33 from MKM, the most recent firm to weigh in.
It’s not a mystery why folks are bearish. Patent expirations loom and are expected to suck billions in revenue out of the company. Fiscal 2011 earnings are set to roll back slightly and then lurch down 25% in fiscal 2012.
Eli Lilly is a behemoth that’s certainly not going bankrupt. But the writing is on the wall — sell this stock if you own it, and consider playing the downside by buying puts.
Oh, poor Netflix (NASDAQ:NFLX). It’s the crash on Wall Street that makes all of us slow down and rubberneck.
But lest you think this company is a bargain after its horrible 2011 and its recent strength, consider that even the sycophants on Wall Street know better than to talk up this disaster. Factset tallies 28% of the analysts covering Netflix have a sell recommendation vs. just 14% on the buy side. Out of a 23 experts tracked by Thomson/First Call, the mean price target is $90.60 — basically right where NFLX is now — and the median is $80.
But some of those targets are stale, from months ago. What are folks saying lately? Well, the latest recommendation was from Canaccord Genuity, which reiterated its sell recommendation on Nov. 29 and revised its already ugly target of $60 a share down even lower to a mere $57.
The lowest target for NFLX? Just $45.
More telling is that the investment bankers appear to be putting their money where their mouth is. As of Dec. 15, short interest in Netflix was about 20% of the available stock, with 9.9 million shares held on the downside. That was down slightly from 10.9 million the prior month, but clearly the bears are still sharpening their claws on this fallen entertainment stock.
Folks may think that the worst is over for Netflix, but even Wall Street fat cats appear to think more money can be made on the downside. Traders should take heed and short Netflix — and bottom feeders should look elsewhere.
I know, this isn’t even fair. Anyone who has stepped into a Sears (NASDAQ:SHLD) store in the last few years knows the score on this one. Crumbling brick-and-mortar operations, the tarnish on once-proud store brands like Craftsman and Kenmore, and recent news that over 100 underperforming Sears and K-mart stores will be shut down.
But sometimes restructuring can work, right? After all, that sly hedgie Eddie Lampert knows a thing or two about squeezing value out of companies. . .right?
Not so much. The Sears chairman may have a name on Wall Street, but his buddies don’t seem to be cutting him any slack. To the point: 60% of analysts — more than half, and how rare is that? — rate the stock a sell. Zero rate it a buy, according to Factset.
According to Thomson/First call, the high price target for SHLD is $27. That’s a best-case scenario and below current pricing. The low is $19. That puts the median at $20 and the mean at $22.
I won’t belabor the reasons why. Sears Holdings has lost money in five of the past six quarters. Even worse: November marked a stunning 19 straight quarters of sales declines. The writing is on the wall.
So don’t be silly and bargain-hunt in Sears right now. Even the yes men on Wall Street are saying no to this dog with fleas.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.