Wall Street hates giving out Sell ratings. We all know that. Sell-side analysts love to pump up stocks, especially ones attached to their brokerages and investment banking divisions, so they flood the market with a bunch of Buy and Hold ratings. But, just how bad is this pumping? Pretty bad. FactSet data shows that of the over 11,000 analyst ratings on stocks, only 6% are Sell ratings.
There are two investment implications here. Don’t listen to Buy ratings — Wall Street over-hypes, and Buy ratings don’t mean much. But, pay attention closely to Sell ratings — Wall Street over-hypes, so whenever a stock gets a Sell ratings, that’s noteworthy.
Indeed, academic research supports these implications. A recent study from Sung Jun Park and Ki Young Park of Yonsei University, which looked at nearly 720,000 analyst recommendations from 1994 to 2017, found that the predictive power of analyst Buy ratings has been declining and is largely meaningless, while the predictive power of analyst Sell ratings has not been declining and remains meaningful.
In other words, if Wall Street analysts are all saying sell a stock, history and common sense both say that you probably want to sell that stock.
With that in mind, I’ve put together a list of five stocks to sell, based on Wall Street ratings. That is, these are five stocks which have a consensus analyst recommendation that skews toward Sell, with a YCharts recommendation rating of above 3 (where 1 is equivalent to a Buy rating, and 5 is equivalent to a Sell rating, so stocks with a rating above 3 have more Hold and Sell ratings than Buy ratings — a rarity among stocks).
Stocks to Sell Now: GoPro (GPRO)
Consensus Wall Street Rating: Hold to Underperform (3.29)
Action camera company GoPro (NASDAQ:GPRO) counts itself as one of the few stocks on Wall Street that has more Hold and Sell ratings, than Buy ratings, with a consensus analyst rating that hovers just below Hold.
This bearish Wall Street take on GPRO stock makes sense. This is a niche, low-margin hardware company with a small addressable market, long upgrade cycles, muted demand drivers, tons of competition and a lack of visibility toward sustained profitability. There’s also more cash than debt on the balance sheet, and new camera launches are being delayed — only adding to uncertainty surrounding where this struggling camera company will go next.
GPRO stock has also been a secular loser. This was a $100 stock once. It now trades at all-time lows below $4.
All in all, there isn’t much reason to be confident about GPRO stock going forward. As such, the analysts appear to have hit the nail on the head here — GPRO stock should be avoided here and now.
J.C. Penney (JCP)
Consensus Wall Street Rating: Hold to Underperform (3.45)
Struggling mall retailer J.C. Penney (NYSE:JCP) also counts itself as one of the few stocks on Wall Street that has more Hold and Sell ratings, than Buy ratings. The consensus recommendation on JCP stock is 3.45, bordering right in between a Hold and Underperform rating.
Again, Wall Street’s bearishness here seems fully warranted by poor and deteriorating fundamentals. Once an important player in the U.S. retail landscape, J.C. Penney failed to adapt to e-commerce disruption in a timely manner, and is now an afterthought in the retail landscape, as consumers have migrated to more relevant retailers with more relevant offerings. That’s why JCP’s sales, margins, and profits have been in a downward spiral for several years.
Unfortunately, there’s not much JCP can do at this stage to turn things around. The company doesn’t turn a profit, they don’t have much cash on the balance sheet, and there’s a ton of debt. Thus, JCP doesn’t have the resources or capacity to invest in turning things around, meaning the company’s most likely path forward is a continued decline towards the retail graveyard.
Rite Aid (RAD)
Consensus Wall Street Rating: Underperform (4.00)
The worst rated stock on this list is struggling pharmacy retailer Rite Aid (NYSE:RAD), with a consensus sell-side rating of Underperform — a significant rarity in the stock market.
Rite Aid’s ugly fundamentals seem to warrant Wall Street’s bearishness. Rite Aid is pretty much the pharmacy version of J.C. Penney. You have a debt-burdened specialty retailer that was slow to pivot to e-commerce disruption, meaning bigger peers have passed the company up and consumers have mostly abandoned stores. Now, because Rite Aid’s cash flows are constrained and have to go toward paying off debt, the company doesn’t have the necessary firepower to make this pivot and compete at scale with bigger, better players in the space.
The result? Rite Aid seems doomed to struggle for the foreseeable future.
Despite this reality, RAD stock has soared over the past few months. The rally seems to be a byproduct of the company’s new partnership with Amazon (NASDAQ:AMZN). But, this rally seems to be fueled by speculation — and until the numbers do improve thanks to the Amazon partnership, I think Wall Street’s Underperform rating is fully warranted.
Signet Jewelers (SIG)
Consensus Wall Street Rating: Hold to Underperform (3.33)
Another struggling retailer that Wall Street has grown sour on is Signet Jewelers (NYSE:SIG). SIG stock has a consensus sell-side rating of 3.33, implying mostly Hold ratings with a handful of Underperform/Sell ratings.
There are a few reasons why Wall Street doesn’t like SIG stock. First, millennial and Generation Z consumers are pushing off big life events, like marriage and many of them are choosing to not get married altogether. Second, of those younger consumers that do pull the trigger on weddings, the engagement rings they prefer are lab-created diamonds and that market is dominated by a lot of upstart jewelers, not the incumbents like Signet. Third, Signet’s financials have represented these secular challenges, while the balance sheet is loaded up with debt — making bankruptcy a not-that-unlikely outcome here if financial struggles persist.
Putting all that together, SIG stock deserves a Sell rating today. Sure, things could get better over the next few years. But, the current trend remains so depressed that, until the numbers actually show some improvement, investors and analysts have every right to be cautious, especially considering the mountain of debt on the balance sheet.
Net net, stay away from SIG stock for now.
Macy’s (M)
Consensus Wall Street Rating: Hold to Underperform (3.31)
Last, but not least, on this list of Wall Street stocks that analysts are saying to sell is struggling mall retailer Macy’s (NYSE:M). For the first time in YCharts analyst rating history, which dates back to 2015, the consensus analyst rating on Macy’s stock has gone above 3, meaning that for the first time in the past five years, Macy’s stock has more Hold and Sell ratings, than Buy ratings.
This is no coincidence. The fundamentals underlying Macy’s stock have consistently deteriorated over the past several years. Today, they are far from good. Sales growth is sluggish. Margins are under pressure. Profits are dropping. The balance sheet is still levered up. Importantly, the macro retail sales backdrop is actually healthy — meaning that Macy’s is struggling during good times. How will the company fare during bad times?
Naturally, investors have ditched the stock, and analysts have downgraded the stock. There is potential for a turnaround here. Will such a turnaround materialize? Maybe. But, probably not, because there is nothing all that special about Macy’s that consumers need, which they aren’t already getting elsewhere.
The takeaway? Stay away from Macy’s stock for now.
As of this writing, Luke Lango was long AMZN.