The Pros' Picks: 5 Stocks to Sell or Avoid
Equity analysts don't exactly relish highlighting stocks to sell. Thus, when a company racks up several Sell calls, investors should take note.
Most investors love discovering new investment ideas and are frequently on the hunt for their next great stock pick. But proper portfolio maintenance requires more than relentless buying – from time to time, you have to keep your eye out for stocks to sell or avoid.
Every portfolio needs the occasional pruning. A stock's bull case might suddenly go up in flames. A productive holding might become outrageously overpriced. A successful pick might balloon to an outsized part of your portfolio. In each case, it would pay to unload at least part of your position, if not all of it.
And every portfolio certainly has a better chance of outperforming if you avoid self-inflicted injuries. That means some of your best investments will be those you don't make. Learning how to identify and react to red flags will make you less likely to buy stocks that will become a drag on your returns.
Thus, while we frequently scour the markets for the best stocks to buy, we occasionally try to uncover stocks to sell or avoid, too. With that goal in mind, we analyzed the Russell 1000 index for stocks that Wall Street analysts like the least.
Despite that the three major indexes are trading at some of their most historically pricey levels, the list of Sell-rated stocks comes to just 10 at present, according to S&P Global Market Intelligence. That might sound surprising, but consider that analysts have always been reluctant to dole out Sell calls. Suffice to say that if you find a cluster of them, you've got a strong warning on your hands.
Read on as we highlight five stocks to sell or avoid, according to the Wall Street analyst community.
Data is as of July 19.
- Market value: $12.0 billion
- Analysts' ratings: 0 Strong Buy, 0 Buy, 11 Hold, 3 Sell, 3 Strong Sell
Let's start with Lennox International (LII, $317.14) which provides products for residential and commercial heating and cooling systems. Its products include furnaces, air conditioners, boilers, thermostats and air purifiers, among other items.
Analysts are hardly screaming "fire!" about Lennox shares – its 3.53 consensus rating (Sell) is just on the verge of being a bearish Hold. And a median price target of $301.69 means shares have modest downside but aren't wildly overcooked, in Wall Street's eyes. But again, we'll note that this level of collective pessimism remains rare at the moment.
So, why do the pros have Lennox listed among their stocks to sell or avoid?
William Blair recently downgraded the stock to Market Perform (Hold) from Outperform (Buy) after the company unexpectedly announced that Chairman and CEO Todd Bluedorn will give up the helm in the middle of next year.
"To be clear, we do not believe that Bluedorn stepping down is related to concerns about future growth," write William Blair analysts Ryan Merkel and Paul Dircks. "However, the optics do not look good at a time when AHRI shipments [central air conditioners and air-source heat pumps] are about to moderate from highs due to difficult compares created by the pandemic."
UBS analysts Damian Karas and Markus Mittermaier add that "LII has experienced strong operating/stock performance the last 15 years under Mr. Bluedorn's leadership; as such, we expect a negative stock response on the news,"
The pair, who rate the stock at Neutral (the equivalent of Hold), also note that while Lennox upgraded their 2021 revenue and earnings per share (EPS) guidance, their forecasts still came in below consensus and UBS expectations.
FactSet Research Systems
- Market value: $12.7 billion
- Analysts' ratings: 0 Strong Buy, 1 Buy, 7 Hold, 4 Sell, 4 Strong Sell
FactSet Research Systems (FDS, $337.18), better known as just FactSet to most, provides data, research, portfolio analytics and other market solutions to more than 153,000 financial professionals worldwide.
Those specialties served FDS well as investor interest surged coming out of the pandemic bear market. But a lightning-quick stock recovery to new all-time highs by August 2020 has since evolved into a nearly yearlong plateau. The analyst community has gone cold on the stock, too, and FactSet's most recent earnings report did little to convince them otherwise.
"FDS shares underperformed following F3Q results despite above-consensus results on the top line relative to the Street," says UBS analyst Alex Kramm (Sell). "Although management raised its FY21 [annual subscription value] guidance, this was overshadowed by the associated expenses expected to weigh on margins in the near term."
The analyst adds that he fails to see a catalyst that could drive ASV growth to significantly higher levels from here.
Raymond James' Patrick O'Shaughnessy maintained a Sell-equivalent Underperform rating, as well, citing margin pressures that should continue to weigh on earnings as FactSet rolls out its cloud migration.
"Overall, our view is that FactSet is a mid-single-digit revenue growth story with modest long-term margin upside, and we believe the company's current valuation is expensive relative to its growth profile," he says.
In total, eight analysts have FDS among their stocks to sell, with another seven in the Hold camp and just one saying it's a Buy.
- Market value: $4.2 billion
- Analysts' ratings: 0 Strong Buy, 0 Buy, 4 Hold, 1 Sell, 3 Strong Sell
Xerox Holdings (XRX, $21.95) is a world leader in workplace and digital printing solutions, providing everything from small home-office printers to the giant all-in-one workstation camped out somewhere near your workplace's water cooler.
While the vast majority of stocks have at least recovered to their pre-pandemic highs, Xerox remains down roughly 40% – a clear reflection of how COVID has upset the printing-business landscape.
Specifically, the work-from-home movement was also a digital movement. While printers haven't been completely phased out of the American employee's workflow, it's certainly less mission-critical than it was at least two years ago. Meanwhile, businesses that maintain some sort of hybrid arrangement with their employees will need less printing volume, which means less wear and tear on Xerox equipment. That, in turn, means fewer repairs and replacements.
At present, none of the eight analysts covering XRX rate the stock a Buy – instead, they're split between Holds and Sells. And they've been pretty mum on the stock of late.
For instance, CFRA Research's David Holt (Hold) last sounded off on the company back in April when he trimmed 2021 and 2022 EPS estimates, yet lifted his price target to $25 per share (from $23.82 at the time).
"From here, we think share performance will be largely influenced by the number of employees at larger enterprises that are brought back to the office, which would augment the recovery in XRX's Post Sale segment through higher print volumes," he says. "Our current Hold rating reflects limited optimism in longer-term growth prospects, but that the sluggish recovery in fundamentals is adequately built into current estimates."
In June, Credit Suisse noted in some improvement on the return-to-work front but maintained a Neutral rating and a $20 price target.
"Return to office is following vaccination trends, with a relatively close correlation to revenue albeit with some variation by geography," says Credit Suisse's analyst team. "Equipment sales are leading as companies invest in anticipation of employees returning. Post Sale [contracted services, equipment maintenance, supplies and financing], on the other hand, takes a little longer to ramp as it's more dependent on actual usage, though trends should continue to improve through the year."
- Market value: $4.7 billion
- Analysts' ratings: 0 Strong Buy, 0 Buy, 2 Hold, 1 Sell, 3 Strong Sell
Hawaiian Electric (HE, $42.61), like most other utility stocks, is virtually the only game in town. This electric utility holding company, via its Hawaiian Electric, Hawai'i Electric Light and Maui Electric subsidiaries, provides power to roughly 95% of the state's population. As one would expect, its regulated operations help fund a decent dividend – one that yields 3.1% at current prices.
But Hawaiian Electric does have one ace up its sleeve of sorts. Roughly 12% of its revenue is generated by its American Savings Bank subsidiary, which offers financial products such as business and consumer banking, home loans and insurance.
Still, that combination of businesses did little to keep Hawaiian Holdings aloft. The pandemic ravaged Hawaii's tourism-centric economy, putting pressure on the utility and banking businesses alike. Indeed, after a bout of volatility during the worst of the pandemic bear market, the stock continued declining into the fall. HE shares staged a rally throughout March that brought them to near early 2020 prices, but have since remained flat.
With a median 12-month price target of $38.50 (roughly 10% downside), analysts don't expect things to get much better for shareholders, though it's largely an argument about valuation.
"The regulatory outlook for HE's base utility is stable. Helped by a reopening of the economy, a capital spending plan that is focused on renewable development and grid modernization, we expect utility earnings to grow at an annual rate of approximately 5%," say UBS analysts Daniel Ford and Paul Cole (Sell). "We expect earnings at the American Savings Bank subsidiary to grow at a more modest 2% and for HoldCo expense to remain relatively flat through the forecast period."
That low-growth profile compares unfavorably to what UBS deems a "premium" price-to-earnings (P/E) multiple compared to HE's electric utility peers.
- Market value: $12.0 billion
- Analysts' ratings: 0 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 2 Strong Sell
Brick-and-mortar video game retailer GameStop (GME, $173.49) is currently the worst-rated Russell 1000 stock, but that comes with an important asterisk:
Few analysts even cover the stock anymore.
GameStop, once primarily known for bringing kids joy through the retail sales of video games, consoles and accessories, is now just as recognized for being the vanguard of the "meme stock" movement and a shining example for how lucrative some short squeezes can be. Indeed, GME shares are up some 820% year-to-date.
Of course, it was closer to 2,500% higher at one point in January. And in general, volatility has been the name of the game – generating big gains and losses alike, and creating a massive headache for analysts trying to pin a legitimate value on GME shares.
Several have just given up altogether. Consider Baird's final coverage note on GME back on June 28:
"While we recognize that GameStop is in the early stages of reformulating its retail strategy to reflect the realities of the digital age, including the rapid shift away from physical video game sales and the broader transition to e-commerce, we believe share price volatility is tied more closely to non-fundamental trading, social media influences and other factors that make it difficult, at least in the near term, to make a reasonable stock rating recommendation to institutional investors," Baird analyst Colin Sebastian writes. "As such, we are temporarily suspending our rating and price target until the company more clearly articulates new management's business strategy, which should also allow investors to better assess the company's intrinsic value and prospects for future free cash flow generation."
Two of the remaining three analysts covering GME rate it among their stocks to sell, while the other calls shares a Hold. But long-term investors might be better following Baird's lead, and waiting until the retail dust has cleared – and until a clearer picture of GameStop's turnaround plan has emerged.