Wall Street likes to follow the adage: If you can’t say something nice, don’t say anything. Just look at analysts’ current recommendations concerning shares of the large American companies that make up the S&P 500 index. There are 10 positive assessments (“buy,” “outperform” or the like) for each negative one.
The numbers don’t necessarily suggest a conspiracy. A cynic would say that analysts tout stocks so that their firms can win those companies’ banking business, and there’s ample evidence of past misconduct among investment banks with research arms, but there are also strict new conflict-of-interest rules that have been enacted in recent years. And besides, a more benign explanation of the lopsided recommendation count seems likelier to be true; brokerage clients mostly want to hear about stocks to buy, not avoid, so analysts oblige by finding supposed winners.
That’s just it, though —“buy”-rated stocks aren’t winners, especially. They tend to merely keep pace with the broad market over long time periods, studies show. (Specifically, Wall Street’s favorite stocks tend to do well in rising markets and poorly in falling markets, suggesting analysts, like most investors, are fond of popular stocks and wary of discounted ones.) “Sell”-rated stocks, on the other hand, really do tend to perform as promised, which is to say, lousily. It’s a shame analysts are so upbeat, because their boos are more profitable than their cheers.
A search among S&P 500 companies for ones with at least three fresh negative recommendations issued over the past 13 weeks turned up just three names, listed below.
KeyCorp
Shares of Cleveland-based KeyCorp (KEY: 8.80, -0.39, -4.24%) have rallied in recent months, but still sell for one-quarter their price of three years ago. The company is expected to post its third consecutive annual loss this year. Analysts say the regional bank’s credit quality measures are improving, but that its profitability remains weak, and that the company’s heavy exposure to commercial real estate loans adds risk. Upon downgrading the stock last week along with other regional names, UBS analysts issued a note to clients citing unsustainable valuations and an earnings recovery that “will fall well short of expectations.”
Diamond Offshore Drilling
Prices for high-end oil rigs have fallen from around $700 million to $500 million in recent years, and Houston-based Diamond Offshore Drilling (DO: 85.18, -0.42, -0.49%) has bought two and is expected to shop for more. Long-term, the purchases should pay off, but recently the company’s existing rigs have had more downtime than it or analysts would like. That could hurt dividend payments, according to BMO Capital, which downgraded the stock last week. Diamond pays out tiny “regular” dividends each quarter but supplements them with giant “special” dividends. The stock’s trailing yield is over 9%. Without the special payments, it would have been below 1%.
PulteGroup
PulteGroup (PHM: 13.04, -0.15, -1.13%) is a home builder based a half-hour drive north of Detroit. Its shares peaked at over $45 in the bubbly summer of 2005. Today they sell for $11 and change. Why turn negative on them now? Analysts who did so earlier this month cited the expiration of certain government perks for home buyers, including an $8,000 tax credit and a central-bank program designed to keep mortgage rates low, and also nagging economic problems, like high unemployment. Pulte has operated at a loss since 2007 and is expected to do so this year. Last year, Pulte bought low-end home builder Centex in a $3 billion stock swap. The deal created $1.4 billion in “goodwill” on Pulte’s balance sheet. That’s an accounting term for value that’s supposed to exist but can’t be explained by hard assets. In other words, it’s a sign that Pulte overpaid.
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