Daily Press (Sunday)

Wall Street’s analysts did a little better in 2023

- John Dorfman John Dorfman is chairman of Dorfman Value Investment­s LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanval­ue.com.

If anyone could predict the future, you’d think Wall Street analysts could.

They boast degrees from Harvard, Yale and the like. They pull down handsome salaries. They have up-to-date computer programs, and smart assistants who work long hours.

Yet, in my 25-year study pitting analysts’ most-adored stocks at the beginning of each year against their most-despised stocks, it’s fairly close to a dead heat.

The analysts’ favorites have averaged a 6.7% gain. The stocks they scorn have averaged 6.5%.

Meanwhile, the Standard & Poor’s 500 Total Return Index has averaged 12.1%.

My study covers the years from 1998 through 2023, with the exception of 2008, when I was temporaril­y retired as a columnist. Each year, I look at the four stocks analysts most unanimousl­y acclaim, and the four with the highest percentage of sell recommenda­tions.

Only U.S.-based stocks covered by four or more analysts are included in the study. The minimum market value is $500 million. I used Zacks Investment Research as my source for analyst ratings.

The adored stocks have beaten the despised ones 13 times out of 25. The despised stocks have won 11 times, and there was one tie, in 1998.

Compared to the S&P 500, the analysts’ darlings have won only eight times. The hated stocks have won 10 times.

2023 results

Last year, the analytical corps did a little better than usual. In 2023, their favorite picks averaged a 25.6% return, edging out the S&P at 26.3%. The despised stocks advanced 9.2% last year.

Karuna Therapeuti­cs Inc. (KRTX), which started 2023 with 19 analyst buy recommenda­tions and no dissents, advanced 61%. It is working on drugs for schizophre­nia and dementia-related psychosis. Of 20 analysts who now cover it, 18 rate it a buy.

S&P Global Inc. (SPGI), which had 18 buy recommenda­tions, jumped 33%. T-Mobile U.S. Inc. (TMUS), which had 15 recommenda­tions (and no dissents) when the year began, gained 15% — a good gain, but not as good as the S&P Schlumberg­er Ltd. (SLB) with 18 unanimous votes, fell about 3%.

Among the despised stocks, only Southern Copper Corp. (SCCO) did well. It rose nearly 43%, as widespread prediction­s of a U.S. recession proved inaccurate.

Clorox Co. (CLX) and Greif Inc. (GEF) had modest gains, while American States Water Co. (AWR) declined 11%.

Most adored

Schlumberg­er Ltd., which was second in analysts’ esteem a year ago, has moved up to No. 1, with 20 affirmatio­ns and no dissents. It has a reputation as a premiere oilfield service company, with advanced techniques for reservoir mapping and well constructi­on. Like the analysts, I’m fond of this stock.

S&P Global Inc. moves up to No. 2 from No. 3. It carries 19 buy recommenda­tions and no “hold” or “sell” ratings. S&P is the world’s largest bond rating agency, and also provides financial informatio­n. I think the analysts are counting on a comeback in bond issuance, skimpy lately.

Third most loved is Targa Resources Corp. (TRGA) a natural-gas processing and pipeline company based in Houston.

This one is not for me, as debt is five times equity, and the price/ book ratio (stock price divided by corporate net worth per share) is over seven.

In the fourth spot among analysts’ darlings is Privia Health Group Inc. (PRVA) of Arlington, Virginia. It describes itself as “a physician-led, multi-specialty medical group of top independen­t physicians.” I like Privia’s clean balance sheet, but I’m otherwise not impressed enough to buy the stock.

Most despised

As 2024 gets rolling, analysts’ most-despised stock is Avista Corp. (AVA), with three sell ratings out of four opinions. It’s an electric and natural-gas utility based in Spokane, Washington and serving the Pacific Northwest.

I believe that fear of legal liability related to wildfires accounts for some of analysts’ aversion. On the plus side, Avista offers a dividend yield of 5%.

Moelis & Co. (MC) comes in second, with four “sell” ratings out of six opinions. Earnings plunged last year at this investment-banking company, and revenue has been in a long-term downtrend.

Underwriti­ng deals were sparse in 2023, but perhaps 2024 will be better.

Third most despised is Southern Copper, which did well last year even though analysts hated it. Can this stock defy the analysts’ gloomy prediction­s again?

Maybe, but the stock seems fully priced to me.

Rounding out the despised list is Chenierre Energy Partners LP (CQP), which operates liquefied natural gas terminals. It has seven “sell” ratings out of 11 opinions. Analysts prefer its parent company, Chenierre Energy

Inc. (LNG), which has 16 “buy” ratings.

Can the adored stocks beat the despised ones this year? Based on past experience, it’s close to a toss-up.

Disclosure: I have no positions in the stocks discussed in today’s column, personally or for clients.

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