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- By John Dorfman
As a new year gets underway, the four stocks Wall Street analysts love most are Amazon.com (NASDAQ:AMZN), Microsoft Corp. (NASDAQ:MSFT), Burlington Stores (NYSE:BURL) and Valero Energy (NYSE:VLO).
Should you run out and buy them? No, according to my 22-year study.
Analysts' favorites frequently flop. For example, at the beginning of last year, 15 analysts recommended Viper Energy Partners (NASDAQ:VNOM), with no dissenting votes. It fell 51%.
Enterprise Products Partners LP (NYSE:EPD), with the unanimous approbation of 13 analysts, dropped 24%. Centene Corp. (NYSE:CNC), with 12 recommendations, was slightly down as well.
Of the analysts' four most adored stocks, only one, Exact Sciences Corp. (NASDAQ:EXAS), did well, advancing 43%.
In total, the analysts' most beloved picks plummeted 35.5%, while the stocks they hated the most at the start of 2020 posted a positive return of 20.3%, helped by good returns in Waddell & Reed Financial Inc. (NYSE:WDR) and News Corp. (NASDAQ:NWSA).
The unimpressive showing by the analysts was no fluke. Analysts are great at putting out information about companies, but most are no great shakes as stock pickers.
For 22 years, I have been tracking the annual performance of the four stocks analysts love most at the start of each year, and the four stocks they most despise. The analysts' favorites have averaged a 5.9% gain. The ones they regard as dogs have averaged 7.4%.
Meanwhile, the Standard & Poor's 500 has averaged a 12.0% return, beating both the adored stocks and the despised ones. All figures are total returns including dividends.
In 22 years, the adored stocks have beaten the despised ones 11 times and the despised stocks have won 10 times. There was one tie.
Stocks of foreign stocks and bankrupt companies are excluded from the analysis. In case of ties, which are rare, the company with the larger market value is listed.
Amazon.com Inc. is a great company. Over the past decade, it has grown its revenue at a 25% annual clip, and its earnings even faster. According to Zacks Investment Research, 32 analysts tag it as a "buy," with not a single "hold" or "sell" rating.
And yet, is any stock worth 93 times earnings? At that altitude, I think the odds are against good performance.
Next most popular is Microsoft Corp. with 23 "buy" ratings and no dissents. Again, it's an outstanding company. But should investors really pay 11 times revenue and 13 times book value (corporate net worth)?
Burlington Stores Inc., which sells low-priced clothing at more than 700 stores, got 15 votes with no dissents. I think the company's niche is timely, as I fear that the recession may linger even after the pandemic ends. But the stock has already more than doubled since the March pandemic low.
Valero Energy Corp., the big refiner, got 14 "buy" ratings, with no "holds" or "sells." I like this one better. As plane and car travel gradually recovers post-vaccine, Valero's sales of jet fuel and gasoline should increase substantially. And the stock sells for only 0.3 times revenue.
Let's have a look next at the stocks that analysts despise.
SecureWorks Corp. (CSWX), out of Atlanta, offers software and consulting to help companies avoid cyberattacks or respond to them. That's a great niche. However, the company has yet to show an annual profit and it faces large, well-qualified competitors.
Southern Copper Corp. (SCCO) mines copper in Peru, Argentina, Childe, Ecuador and Mexico. Four analysts out of six dislike it. An economic recovery would be great for copper demand. I think the stock is ahead of itself (up 54% in the past year), but I don't think it will do badly.
Macerich Co. (MAC), based in Santa Monica, California, is a real estate investment trust that owns some 47 shopping malls. The probable end of the pandemic this year will help malls, but I feel that the tide is still in favor of online shopping.
I think, therefore, that mall owners will have a tough time raising rents. Of 14 analysts who cover Macerich, nine say to sell the stock.
American Airlines (AAL) was fourth-most hated, with eight "sell" ratings out of 13 opinions. Two issues rear their heads here. How quickly will travelers return once there's a Covid-19 vaccine? And can American sustain its tattered balance sheet with corporate net worth at negative $5.5 billion?
I don't know whether the adored stocks will manage to beat the despised ones in 2021. What my study shows, though, is that unanimous favorable opinion from analysts is no guarantee. In fact, it's good cause to worry.
Disclosure: Some of my client (and some members of my family) own Amazon.com and Microsoft.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.
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This article first appeared on GuruFocus.