Finding stocks to sell that analysts are pessimistic about is a tough one.
That’s because analysts are in the business of making their investment banking clients (or potential clients) look good. Consequently, you’ll often see many investment firms with hold ratings on particular companies. Of course, that indicates a negative view of a stock, but they don’t want to jeopardize the business relationship.
It’s called sitting on the fence.
For this article, I’ve selected three stocks to sell from the S&P Composite 1500, where at least 10 analysts have a rating on the stock, and at least half of the ratings are “underweight” or outright “sell.”
If analysts are willing to go out on a limb for a given stock, it’s often because there’s no hope of getting any business from the company. It could also be that it’s transparently obvious that the company is of poor quality.
Ultimately, however, and I fall into this camp, it’s much easier to stand behind a business than tear it down.
Of the three names selected, one is clearly a dud. The other two’s low standing with analysts likely has more to do with the current economic environment than anything particularly negative about each’s business.
Stocks to Sell: Bed Bath & Beyond (BBBY)
Pretty much the only person who made real money on Bed Bath & Beyond (NASDAQ:BBBY) is Chewy (NYSE:CHWY) co-founder Ryan Cohen. He made nearly $70 million on what many have described as an elaborate “pump-and-dump” scheme.
On Feb. 10, the Ontario Superior Court granted Bed Bath & Beyond Canada creditor protection under the Companies Creditors Arrangement Act. Without support from its struggling U.S. operations, the Canadian division has been forced to liquidate its inventory. As a result, all 54 stores will close, putting 1,400 full- and part-time employees out of work.
Yet Ryan Cohen, the so-called potential savior of BBBY and Gamestop (NYSE:GME), got even wealthier than he already was.
Of the 10 analysts that cover Bed Bath & Beyond, eight either have it “underweight” or “sell” with an average target price of $1.64, 20% lower than where it’s currently trading. I have no idea how there could be any holds on this sickly stock, but that’s Wall Street for you.
The company recently threw a Hail Mary by selling $225 million in convertible shares. It could raise an additional $800 million down the road from the issuance of warrants. But, as Michael Burry (The Big Short) has said, it’s now in a “death spiral.”
It’s hard to call BBBY anything but a big SELL!
Robert Half International (RHI)
Of the 14 analysts that cover Robert Half International (NYSE:RHI), seven either have it “underweight” or “sell” with an average target price of $73.64. That’s about 13% lower than where it’s currently trading.
Since the global human resource staffing and consulting firm reported Q4 2022 results on Jan. 26, its stock gained about 4% of its value. The company delivered $1.37 a share, one penny better than the consensus analyst estimate, while it missed the revenue estimate by $10 million.
CEO Keith Waddell said: “2022 was a very successful year across the entire Robert Half enterprise. We grew full-year revenues and earnings per share — both by more than 12 percent — and achieved new record levels for each,” Robert Half’s press release stated.
The analyst per-share estimate for 2023 through 2025 is $4.84, $5.62, and $6.70, respectively, with a compound annual growth rate (CAGR) of 3.8%. The revenue estimate for 2023 is 6.0% lower and 6.6% higher in 2024, with a three-year CAGR of 1.5%.
The company says it’s “optimistic” about delivering in 2023, but the analysts aren’t convinced even though its valuation by most financial metrics is currently inexpensive.
For example, its trailing 12-month free cash flow is $623 million [key ratios]. Based on a market capitalization of $9.1 billion, its free cash flow yield is 6.8%. I consider anything above 8% to be in value territory.
Should a recession hit in the year’s second half, you can be sure that the demand for its services will fall off a cliff, most likely resulting in a cut in earnings estimates.
Stocks to Sell: Principal Financial Group (PFG)
A total of 17 analysts cover Principal Financial Group (NYSE:PFG). Of those analysts, nine have it as an outright “sell” with an average target price of $83.43, 10% lower than where it’s currently trading.
The life and health insurance and wealth management company reported Q4 2022 results at the end of January. While they beat on top- and bottom-line estimates for the entire year, operating net income and revenues were down over 2021. Except for its U.S. Insurance Solutions business, its pre-tax operating earnings were down year-over-year.
Like Robert Half, Principal CEO Dan Houston believes that the company made huge strides this past year in transforming its business to one that’s delivering higher growth with less risk attached to this growth.
The analysts’ EPS estimates for the next three years are $6.99, $7.72, and $8.35. Based on $6.66 a share in 2022, its CAGR is expected to be 7.8%. That’s a respectable growth rate in my opinion.
In December, Seeking Alpha reported that Credit Suisse analyst Andrew Kligerman downgraded PFG stock to “neutral” from “outperform” on valuation concerns. At the time, it traded at 10.6x Credit Suisse’s 2023 EPS estimate compared to 8x for its financial services peers.
Except for its valuation, Kligerman like’s the company’s focus on small- to medium-sized retirement and employee benefits businesses.
Up 25% over the past year, PFG could be dead money for the next couple of quarters, maybe longer.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.