Analysts love high yield stocks

The more Wall Street analysts like a stock, the less interested I am, as a rule. Unlike birds, which often flock together for long, uncannily accurate flights, analysts frequently head in the wrong direction when they follow each other.

I have 10 years of data, accumulated in real time, to suggest that the stocks analysts love the most usually do poorly.

From 1998 through 2007, the four stocks rated highest by brokerage-house analysts at the beginning of the year dropped 1.7 per cent, on average, in the ensuing 12 months. The four stocks they rated lowest gained 2.2 per cent. Neither group beat the Standard & Poor's 500 Index, which had an average annual gain of 7.2 per cent.

The pattern doesn't hold true every year, but it is more than coincidence. The problem, analysts are drawn to companies with strong and improving operating results. Generally, they aren't fussy about how expensive a stock is when they recommend it.

Stocks advance when a company exceeds prevailing expectations. The higher the expectations, the more difficult they are to exceed. No wonder that stocks favoured by hoards of analysts do badly.

As a sidelight to my annual compilation of analysts' most- loved and most-hated stocks, this week I took a look at some companies within the S&P 500 that analysts particularly like and dislike today. (The annual study covers a wider universe, not just the S&P 500.) To my surprise, I found myself in agreement with the analytical consensus on three top-rated stocks.

Most popular with the suit-and-limousine crowd is Thermo Fisher Scientific Inc., a Waltham, Massachusetts, maker of scientific instruments and laboratory supplies. All 15 analysts who follow it strongly recommend it.

Thermo Fisher withstood the recession well. Earnings in the second quarter were 74 cents a share, down only four cents from the year before and up nine cents from the 2007 level.

For four years, from 2005 through 2008, Thermo Fisher grew its earnings at least 21 per cent annually. This year analysts expect earnings to drop 7 per cent, but that's not bad considering the economy.

Thermo Fisher stock sells for moderate prices, considering its good earnings performance. It fetches 14 times earnings, 1.2 times book value (corporate net worth per share) and 1.8 times per-share revenue.

Only half a dozen analysts follow FMC Corp., a Philadelphia-based producer of industrial, agricultural and speciality chemicals. The six unanimously say "buy."

Falling oil prices and an anticipated economic recovery have been kind to chemical stocks. FMC, for example, is up 24 per cent this year.

FMC was strikingly profitable last year, with a 31 per cent return on stockholders' equity. The stock is reasonably priced at 12 times earnings and 1.4 times revenue. I'm not salivating over FMC, but I would rather bet for it than against it.

I also look favourably on J.M. Smucker Co., and not just because I like its jam.

Actually, preserves are far less of the Orrville, Ohio, company's business than many people suppose. In fiscal 2009, which ended in April, the company had $3.7 billion (Dh13.5 billion) in sales. Only $338 million was from jams and jellies. The biggest segment was coffee, which pulled in $939 million, reflecting Smucker's 2008 purchase of Folgers from Procter & Gamble Co.

Lowest ratings

Hapless Eastman Kodak Co. of Rochester, New York, gets a low rating profile from analysts - two "holds" and four "sells." I have no quarrel with that, but I disagree with the analytical corps on several other unpopular stocks.

Sears Holdings Corp., Legg Mason Inc., Tesoro Corp., Rockwell Automation Inc. and Titanium Metals Corp. all have terrible analyst-recommendation scores. In each case, I see considerable merit to the stocks and would much rather be long than short.

Sears sells for less than book value. Its profits are down, but it hasn't reported a yearly loss since 2003.

Legg Mason, the Baltimore-based investment management firm that's home to famed money manager Bill Miller, will sustain a major loss this year, but analysts expect a return to profitability next year. Chief Executive Officer Mark Fetting may be right when he said an "exciting turnaround" is in progress.