by James Brumley | October 11, 2013 10:30 am
At the end of the third quarter, stocks in the S&P 500 had over 11,000 ratings … and only 5% of those recommendations were “sell,” according to FactSet.
With that in mind, it seems obvious than any stocks stuck with sell ratings from the usually bullish analyst community should be stuck in the gutter … right?
In theory, yes. But in reality, that’s not always the case.
Instead, a few stocks have defied the odds — and defied analysts — so far this year by making huge, market-beating gains while sporting sell ratings. The lesson: Just because the pros hate them, doesn’t mean you shouldn’t own them.
With that in mind, let’s take a closer look at four stocks that analysts hate — but that have put big profits in investors’ pockets so far this year.
Year-to-date gains: 32%
Yes, believe it or not, beleaguered retailer Sears Holdings (SHLD) is one of the year’s biggest winners. It’s a surprise, simply because revenue has declined in each of the past eighteen quarters, the company’s been dipping deeper and deeper into the red ink each quarter, and analysts say there’s no end in sight for the nasty trend.
The market, however, doesn’t seem to agree with analysts’ pessimistic outlook. What are investors seeing in Sears that the professional stock handicappers don’t?
It’s the realizations that (1) the sum of the individual parts here are greater than the whole, and (2) acting CEO Eddie Lampert has made it more than clear he’s willing to part out those pieces — individual stores — in order to maximize shareholder value. (He’s the biggest shareholder, of course.)
A report published earlier in the year figured the value of just the top 400 stores in the 2,000-store chain were worth $7.3 billion if sold, which is far greater than the company’s market cap. It looks like the company has shrunk itself into the real estate play so many investors thought Lampert had in mind when he first acquired the company.
As a real estate play, however, it’s still undervalued even with this year’s big advance.
Year-to-date gains: 48%
As of the most recent look, printer manufacturer Lexmark International (LXK) was up nearly 50% since the end of 2012. Not bad for a company that’s posted two consecutive years of declining revenue, and is en route for a third.
Indeed, had it not been for very good 2010, Lexmark would have posted (and this isn’t a misprint) eight straight years of sliding sales; earnings have largely fallen in step with the deterioration in revenue.
So what, pray tell, could prod such a big run-up in 2013? While the numbers have yet to indicate it, Lexmark is believed by many investors to be in the midst of a plausible turnaround effort that takes it further away from the inkjet business and towards the software and service business.
Though not a high-growth opportunity, software and services is a higher-margin opportunity than the inkjet business, and it should give the company the scalable, reliable revenue opportunity that’s been missing until recently. It’s not a bad business model for increasingly-challenged printer makers.
Year-to-date gains: 100%
Wasn’t Overstock.com (OSTK) supposed to be gone by now, obliterated by much-bigger competitor Amazon.com (AMZN)? Yeah, well, somebody forgot to tell Overstock that.
The company’s steadily grown its revenue from $494 million in 2004 to $876 million in 2009 to $1.2 billion over the past four quarters. Oh, and the company appears to have permanently swung to a profit last year.
That may be why the stock’s up around 100% for the year so far.
So what do analysts not like about the online retailer? Merrill Lynch said customers were lacking, and that revenue growth was inconsistent, doubting four straight quarters of year-over-year sales improvements meant anything.
It’s a valid opinion. It’s just wrong.
Year-to-date gains: 215%
With a whopping 215% gain so far for 2013, Caesars Entertainment (CZR) is easily one of the year’s biggest winners — not just among stocks analysts hate, but even among stocks the analyst community loves.
The reason the professionals can’t stand the company isn’t a complicated one — the casino and gaming organization is neither profitable on a trailing basis, nor is it expected to be profitable in 2014. Revenue continues to be a struggle too.
Investors, however, just don’t care.
While the prod for the multi-month rally isn’t exactly well-defined, the advent of online-gambling has something to do with it. Though online poker in the U.S. is currently only legal in New Jersey — and technically not until November — Caesars is expected to be a dominant name in that arena.
The market may also be celebrating some finality on a nagging situation in Macau. In August, Caesars shed a golf course located in the world’s fastest-growing gambling hub and, though it took a loss on the sale, the company and shareholders are just glad to have it off the books. A massive refinancing seems to have been well-received too, quelling brewing bankruptcy chatter. All in all, the planets have lined up nicely for Caesars Entertainment.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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