A list of 11 S&P 500 stocks that have garnered the lowest analyst ratings and 18-month expectations has recently made the media rounds. It's always good to hear from experts which stocks not to buy. But it's also smart to base your decisions on your own research.
Some of these big names were expected, others were surprises. While I can't predict what will happen over the next year and a half without any certainty, I can offer my opinion based on
Low-Risk Stocks
Paychex, Inc.
Perhaps I’m missing something, but having Paychex, Inc. (PAYX) on this list makes no sense, especially considering what else is out there. Not only has Paycheck consistently grown its top and bottom lines, but it as a debt-to-equity ratio of 0. Without a debt burden hanging over its head, this means Paychex will be better situated than most companies if difficult economic times hit
In the third quarter, total service revenue increased 8% year over year. Operating income increased 5%, net income improved by 6%, and guidance was healthy. Additionally, operating cash flow generation over the past 12 months is $867.90 million and the stock currently yields 3.20%.
Is it possible PAYX takes a hit? Of course. But the underlying company and its operations are strong. Any hits to the stock price might present an opportunity to buy more shares. Dividend payments will help ease any pain.
Moderate-Risk Stocks
People's United Financial
The No. 1 reason to avoid betting against People's United Financial, Inc. (PBCT) is strong stock price momentum to the upside. People’s United Financial is a bank holding company for People’s United Bank, and its first-quarter revenue increased 3% year over year thanks to higher non-interest income. Operating expenses were flat. Swinging back to positive news, People’s United Financial has delivered 22 consecutive dividend increases. It currently offers a dividend yield of 4.20%. The short position is high at 11%, but that’s a risky bet.
Torchmark Corp.
Torchmark Corp. (TMK), the provider of various health and life insurance offerings, saw total net life sales spike 17% year over year in the first quarter, with American Income, Direct Response (Global Life), and Liberty National seeing sales increases of 24%, 11%, and 16%, respectively. Additionally, net health sales and Family Heritage increased 18%, American Income agent count grew 19%, and 1.7 million shares were repurchased. This goes along with a low debt-to-equity ratio of 0.26 and a small dividend yield of 0.90%. The one big negative here is that TMK has been sensitive to broad market declines.
McCormick & Company
Spice company McCormick & Company, Inc. (MKC) has consistently grown its top and bottom lines. It has a healthy debt-to-equity ratio of 0.78, and it currently yields a somewhat generous 2.10%. McCormick has long-term annual growth objectives of 4%-6% in sales, 7%-9% in operating income, and 9%-11% in EPS. Most importantly, it has huge market share in the spice market — it dominates grocery store shelves with its name brands as well as its private label offerings — due to limited competition.
Northern Trust
Northern Trust Corp. (NTRS) is a financial holding company that provides, among many other things, fiduciary and banking solutions for corporations, institutions, families and individuals. If the Federal Reserve raises interest rates later this year, it will be a boon for Northern Trust. So will rates really go up? Federal Reserve Chairman, Janet Yellen, has hinted at an interest rate hike. If the labor market performs well and inflation accelerates, then a rate hike is likely, but these are far from guarantees. And since NTRS has been performing well anyway — up 20.10% over the past year while yielding 1.90% — this certainly doesn’t seem like the ideal short candidate.
Hudson City Bancorp
In the first quarter, Hudson City Bancorp, Inc.'s (HCBK) revenue and earnings plummeted 43.8% and 86.1%, respectively. The poor performance was due to a decline in net interest income and non-interest income as well as lower loan and deposit balances. The only reason HCBK is on the moderate-risk list is because this is a low-beta stock. It’s highly unlikely to see a gap-down of significant proportions. Just keep in mind that the upside potential is also limited.
Campbell Soup
Campbell Soup Co. (CPB) is in a transition phase. Soups and packaged foods have suffered from waning demand and image problems, but Campbell sees the future and is preparing for it. It recently acquired natural foods firm Garden Fresh Gourmet, which puts it more in-line with healthier consumer trends. Full-year guidance has recently been lowered, but this should be a temporary blip. While Campbell Soup may suffer in the near term, it will likely bounce back as it increases its presence in the fresh foods sections of the country's grocery stores.
High-Risk Stocks
AutoNation
This is a unique situation because AutoNation, Inc. (AN) has been performing well, thanks to a combination of lower gas prices, easier credit, low interest rates, and longer repayment periods. However, those last three factors are red flags for the near-future health of the industry. When credit tightens, interest rates are lowered, and repayment periods are shortened, it could be an ugly day for AN stockholders. Of course, this doom and gloom may be a long way off. For now, AutoNation is performing well, as evidenced by a 5% increase in total retail sales in May. Comps also improved 3%. A wise investor wouldn’t see this as a long or a short, but a stock to avoid on both sides.
Diamond Offshore Drilling
In the first quarter, Diamond Offshore Drilling, Inc. (DO) reported a loss of $1.86 per share. To put that in perspective, in the year-ago quarter, the company delivered net income of $1.05 per share. Diamond Offshore is implementing cost-cutting measures, but it still has 20% of its backlog exposed to Petróleo Brasileiro S.A. – Petrobras (PBR), which is still in the process of slashing rig activity
Deere & Co.
Great company, wrong time. A slowdown in the global farm economy has led to lower sales and earnings. This vicious cycle began with lower commodity prices, which led to reduced farm incomes. That then led to reduced demand for agricultural machinery. In the second quarter, Deere & Co. (DE) suffered a worldwide sales decline of 18%. Looking ahead, Deere expects equipment sales to decline 19% for the fiscal year.
Transocean Ltd.
Oil demand is low and supply is high. Since Transocean Ltd. (RIG) rents floating mobile rig, equipment, and personnel to oil companies, this is a clear negative. Transocean has reported three consecutive quarters of losses, and the short position is high at 26.60%. This isn’t necessarily a short, but going long could be risky.
The Bottom Line
Some of these stocks shouldn’t be as
high risk as analysts have reported. But some are. That said, any investment
decisions should be based on your own research. Prior to researching, note that
a lot of trends are based on industry strength and weakness and are often not
company-specific.
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