In the investment world, we give a lot of credence to analyst opinions. Any why not? A single analyst upgrade can trigger colossal buying pressure, sending shares of large-cap companies up double-digits. Understandably, most investors want to capitalize on that rise, but there is another way.
The secret to analysts' power is in how their ratings influence the elephants. With most analysts on the bankroll of major financial firms, a green light from an analyst could be a signal that the firm is set to pick up a large quantity of shares. But analyst favorites only tell half the story on Wall Street – especially after the market meltdown investors witnessed back in 2008. For the other half of the story, it's time to focus on the stocks that analysts hate.
Knowing which stocks to avoid makes a remarkable difference in an investment portfolio. For more proactive investors, taking a short position to bet against struggling stocks opens up even more profit potential. To be fair, just because an analyst doesn't like a stock doesn't mean that its doomed - but when all of the analysts covering the company see fire and brimstone in its future, it's definitely worth noting.
We'll be using numerical analyst ratings, which range from 1 (strong buy) to 5 (strong sell). (For more on analysts and their function, see What To Know About Financial Analysts.)
So without further ado, here's a look at five stocks analysts hate right now:
1. Telmex International (NYSE:TII)
While Latin American stocks - communications stocks in particular - have been hot in the past few years, Telmex International is more on the lukewarm side. Analysts give this stock a bearish average rating of 3.67.
The number-one stumbling block for Telmex is competition. The company, which spun off from Telefonos de Mexico in July 2008, provides telecom and cable services to customers throughout Latin America. Brazil is the company's largest market, but the Brazilian government has been rallying hard to get a domestic competitor in the top spot. So Telemex's growth prospects could be reigned in soon. Thinner margins and a dollar-denominated debt load make the situation all the more bleak.
2. Mercury General Corporation (NYSE:MCY)
Los Angeles-based auto insurer Mercury General has had a difficult couple of years. Like many other insurers, the company has been forced to record major investment write-downs. Although the company posted what seemed to be solid third quarter earnings back in November, 70% of income was the result of investment gains. Mercury's average analyst rating currently sits at 3.80.
Mercury's core market is California, a state that's been plagued more than most by recessionary fallout like unemployment. The company's large portfolio of municipal bonds also plays a part in its risk. With many Californian municipalities under financial stress, the chances of a downgrade could affect Mercury's balance sheet. The biggest concern for the company is its ability to compete on price - the top factor for consumers shopping for auto insurance. In an increasingly difficult economic environment, it's likely Mercury will have to forego margins in exchange for business.
3. Westlake Chemical Corporation (NYSE:WLK)
The New Year hasn't been a good one for Westlake Chemical. In January 2010, the company's shares have already declined 16%. Westlake manufactures basic chemicals, polymers and vinyl products that are used in commercial coatings as well as other applications for construction businesses. The company currently has an average analyst rating of 3.71.
Despite respectable sales growth, the company has seen its margins get squeezed a little more in each of the past few years. The recession has been especially hard on Westlake – the company fell to a loss in 2008 despite recording higher sales.
4. Level 3 Communications (NASDAQ:LVLT)
A $2.3 billion communications company, Level 3 Communications keeps digging itself deeper amid tough market conditions. In its third quarter 2009 earnings statement, the company delivered net margins of -18.56%. This is the latest in a string of losses that goes back for quite some time.
Things don't look much better in the coming year as Level 3 faces a slew of 2009 price cuts for Content Distribution Networks. This is one of the company's key businesses and the cuts are sure to impact top-line performance in 2010. Level 3's analyst rating currently stands at 3.69.
5. K-Swiss Incorporated (NASDAQ:KSWS)
While consumer-driven industries were hit hard the last couple of years, apparel companies found themselves in even deeper trouble as clothing spending got harshly trimmed and U.S. savings rates turned positive for the first time in years. Shoe-maker K-Swiss was one of the apparel stocks affected. It currently has an analyst rating of 3.75.
K-Swiss is known for its popular footwear brand of the same name, as well as its wholly-owned subsidiaries Royal Elastics and Palladium. While the company flourished in the late 1990s, growth has been sporadic for K-Swiss in recent years thanks to increased competition for fewer consumer dollars. The company's top line has shrunk in each of the last four years. Last year was the worst yet as operating income turned negative, and sales dropped nearly 20%.
Time to Get Defensive
Despite bullish sentiment to start the month, January 2010 turned out to be one of the worst months for stocks. Now, with a new month upon us, it's time to think defensively - taking a look at what you shouldn't have in your portfolio is a good way to start. (For more on defensive investing, see Guard Your Portfolio With Defensive Stocks.)