Analyst darlings get no love
Wall Street analysts love American Tower REIT Inc. I do not share their enthusiasm.
The same goes for American Water Works Co., ServiceNow Inc., Envision Healthcare Holdings Inc. and Gray Television Inc.
These companies are doing well. But I feel the analysts are too ready to extrapolate their success into the future.
I view the business world as resembling a Ferris wheel. Companies at the bottom may rotate to the top as they develop products or change leadership. Companies at the top may succumb to increased competition, lured into their industries by the winners' high profit margins.
That's one reason I prefer out-of-favor stocks. When all of Wall Street likes a stock, I usually don't.
Each of the companies mentioned above has debt that exceeds stockholders' equity. It's not a big problem now, when interest rates are low and the companies are doing well. But if circumstances change, the debt could become burdensome.
This is the third time I have highlighted five stocks that Wall Street loves and that I dislike. The first time (May 2012), the analysts' picks failed to match the Standard & Poor's 500 Index. The second time (July 2013), the analysts' picks did very well indeed.
The five stocks from last July returned 45.3 percent including dividends, versus 18.5 percent for the S&P 500. That's egg on my face.
The success of the analysts' darlings from last July was driven in large part by a 108 percent gain in Targa Resources Corp. (TRGP), a Houston company that transports and processes natural gas.
Other big gains among the stocks I disdained were a 53 percent advance for Royal Caribbean Cruises Ltd. (RCL) and a 37 percent return for Las Vegas Sands Corp. (LVS). The only stock that declined was Oxford Industries Inc. (OXM), down less than 1 percent.
I believe that the investment climate in the past 12 months has been favorable to growth and momentum. Interest rates were strikingly low, and American economic growth was accelerating. I suspect the next 12 months will be more kind to value approaches.
Here are five new stocks that analysts love to pieces. I doubt they will do as well as hoped.
Nineteen analysts have “buy” ratings on American Tower (AMT), with nary a “hold” or “sell” in sight. The analysts expect earnings to grow 25 percent in 2015.
High expectations, however, are difficult to meet, let alone exceed. The debt level at American Tower is, well, towering — more than three times equity. And the stock sells for 63 times trailing earnings (33 times estimated 2015 earnings), leaving little margin for error.
American Water Works
Providing water to about 1,500 cities and towns in 16 states, American Water Works (AWK) is one of the few publicly traded plays on the water-scarcity theme. But let's remember that water utilities are still regulated utilities.
Of the 17 analysts who follow the company, 16 rate it a “buy.” But the shares seem fully valued to me at 22 times earnings.
Based in Santa Clara, Calif., ServiceNow (NOW) provides cloud-based information-technology services. That's a hot area, and investors have bid Ser-viceNow shares up to red-hot multiples: 259 times next year's expected earnings, 17 times sales and 20 times book value (corporate net worth per share).
In my opinion, investors are likely to be burned. That could be embarrassing for the 20 analysts who have “buy” ratings on the stock.
The tally on Envision Healthcare Holdings (EVHC) is 14 “buys” and two “holds.” The company, which is based in Greenwood, Colo., provides ambulance services and physician staffing.
It has been growing rapidly, and could get a boost from the Affordable Care Act. More insurance means a higher percentage of patients will pay Envision's bills.
The stock price is 169 times recent earnings and 24 times the earnings analysts expect for 2015. In my experience, valuations in that range rarely lead to profitable investments.
Gray Television (GTN) of Atlanta owns several dozen TV stations in 34 metropolitan areas. Only three analysts follow it, but all three rate it a strong buy.
I have concerns about Gray's balance sheet. Debt is more than $800 million, which is between four and five times stockholders' equity.
I am also skeptical about the price-earnings ratio. The average PE over the years is about 15. The market is now near 19, and Gray is twice that, at more than 39.
Note that all ratios in this article are as of July 11, 2014. I was on vacation the week of July 14.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Healthy safety Mitchell is eager for 2nd season with Steelers
- Knoch secures 1st WPIAL title by defeating defending champion West Allegheny
- Late goal gives Riverhounds victory over Tampa Bay in U.S. Open Cup
- One man found dead when fire sweeps through South Fayette apartment
- Emergency crews search Youghiogheny River in Layton for Charleroi man
- NFL notebook: Vikings coach delivers ultimatum to Peterson
- Pirates use big 7th inning to sweep Marlins, stretch winning streak to 6
- Plum teacher, held for trial, vows to fight witness intimidation charge
- Central Catholic downs Norwin to win 1st WPIAL baseball title
- Ex-Blackhawk star pitcher McKay thriving on mound at Louisville
- Concert business booming at Heinz Field this summer