Stocks adored by analysts pulled a face-plant last year

WHEN 2022 began, Amazon.com Inc. (AMZN) was Wall Street analysts’ favorite stock. Thirty-one analysts said to buy it, with nary a “hold” or “sell” to be heard. The stock fell nearly 50 percent last year.

This is not an anomaly. The other stocks that the analytical corps adored when the year began — Microsoft Corp. (MSFT), Tenable Holdings Inc. (TENB) and Zoominfo Technologies Inc. (ZI) — dropped 28 percent, 31 percent and 53 percent, respectively.

Thus, the analysts’ darlings averaged a 40 percent decline.

Box score

Last year, the despised stocks edged out the adored ones, but that doesn’t mean they were good performers. Clover Health Investments Corp. (CLOV) fell 75 percent, Gamestop Corp. (GME) 50 percent and J. Sainsbury PLC (JSAIY) 24 percent. Only Consolidated Edison Inc. (ED) rose, returning 16 percent.

Average those four numbers, and you get a mean return of negative 33 percent, 7 percentage points better than the analysts’ favorites but 15 points worse than the S&P 500, which fell 18.11 percent for the year, after taking dividends into account.

All this doesn’t mean that brokerage house analysts are stupid. They’re not. But human beings simply can’t predict the future. And analysts are subject to potential sources of bias, such as their firms’ desire to win investment banking assignments from companies.

Adored

As 2023 starts, analysts mostadored stock is Karuna Therapeutics Inc. (KRTX) with 19 “buy” ratings and no “hold” or “sell” ratings. This biotech company, with headquarters in Boston, Massachusetts, seeks to address neuropsychiatric disorders.

I have written several articles arguing that investors should shun stocks selling for more than 100 times revenue. Karuna sells for 136 times revenue.

Second on the favorites list is SLB (SLB), formerly Schlumberger, the largest oilfield service company in the world. It has 18 “buys,” and no “holds” or “sells.” Because I believe the oil-and-gas industry is in a sustainable comeback, I agree with the analysts on this one.

The third darling is S&P Global Inc. (SPGI), with 16 buy ratings out of 16 opinions. It’s a good company, but in my opinion the stock is fully valued.

In fourth place is T-mobile US Inc. (TMUS) with 15 “buy” ratings with no dissents. The stock has done well, but it’s not one of my favorites.

Despised

The stock analysts most despise is American States Water Co. (AWR), with three “sell” ratings out of five opinions. This company was also on the hated list in 2019, yet it rose 31 percent. I tend to agree with the analysts’ dislike, but I don’t find it exceptionally bad.

The same ratings profile applies to Greif Inc. (GEF), which ranks second because it’s slightly smaller than American States Water. I think it’s a decent little company.

Third place in the analysts’ doghouse goes to Southern Copper Corp. (SCCO). Seven analysts follow it, and four rate it a “sell.” I’ve owned this stock in the past with good results, but it’s scary to own a copper company when the economy appears headed for a recession.

Rounding out the despised brigade is Clorox Co. (CLX) with eight “sell” ratings out of 14 opinions. I agree with the analysts’ disdain here. To me the stock seems expensive and the debt too high.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, 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.