Analysts aren't always right. They're not always timely either. But when they're in consensus about a stock, especially when that opinion is bearish (analysts are notoriously rosy with their outlooks), then there's a good chance their collective opinion is on target, and investors might want to heed their outlook.
This proverbial "aligning of the planets" is usually observed in bullish scenarios, but it works the other way, too. That's what makes these three stocks especially scary right now. All three are deep into a net "sell" rating, and it doesn't take a long look at their charts or current stories to agree with the professionals' pessimism.
1. Brown Forman (NYSE: BF-B)
Any stock that's more than doubled since the March 2009 low is clearly doing something right, and especially so if that stock barely faltered during that uptrend. There's a bit of a problem with distiller Brown Forman doing it, though. While earnings have grown during that time, the earnings growth hasn't kept pace with the stock's appreciation. The end result is a rich price-to-earnings (P/E) ratio of nearly 21. Were it a red hot tech stock, such a valuation might fly. For the spirits industry, though, that's pushing it.
Analysts seem to agree, too. Of the 11 current opinions on Brown Forman, six are "holds" and three are outright "sells." That's rough, yet may still understate the aggregate dire outlook.
Despite efforts to weed out an inherent bullishness in analyst opinions in the early 2000s, that bias never really went away. So, even this pessimism for the high-profile large cap may be muted, as some of these research firms don't want to ruffle Brown Forman's feathers.
2. Progress Energy (NYSE: PGN)
What's not to like about an electric utility company? It's certainly not a sexy business, but how could something so benign prompt a strong opinion either way? Whatever the answer is, Progress Energy has managed to do it.
To be fair, the North Carolina-based utility holding company isn't the scourge of the market. Of the eighteen opinions out there on the stock right now, seventeen are "holds" and one is an "underperform." Remember, however, that a bullish bias still exists within the analytical world. At least a few of those "holds" are actually probably closer to "sells" or "underperforms" than analysts may care to admit.
The growing concern about Progress Energy's future isn't unmerited. Although the company has a pretty even mix of coal, nuclear, natural gas and hydroelectric power resources, that diversity hasn't staved off what appears to be an earnings peak in 2011. This year's anticipated income of $3.08 per share is only a tad below what should be $3.10 for 2011 (fourth-quarter 2011 numbers aren't in yet). But, all big trends start out as small ones.
3. Tootsie Roll Industries (NYSE: TR)
Finally, though not heavily followed like Progress Energy and Brown Forman, candy-maker Tootsie Roll Industries has fallen out of favor with analysts. Well, one analyst anyway -- a $1.4 billion company doesn't draw too big of a crowd. Even so, one "sell" rating and a price target of $19.00 compared with the recent share price of $24 is enough to give pause.
Tootsie Roll Industries' praises as a reliable dividend payer have been well-deserved. The quarterly dividend of just under a penny in the late 1980s has swelled -- at an even growth pace -- to a quarterly payout of $0.08 per share now. There's been a growing nagging problem since 2000, however. Annual earnings have fallen from the $1.50 area then to the $0.90 area now... and they're still sinking.
Don't misunderstand; there's still enough cash left over each quarter to keep paying the dividend. Unless things change, though, that won't be the case for a whole lot longer.
One of the key hurdles Tootsie Roll is facing is that the price of sugar skyrocketed in 2010 and has since stayed firm. While larger players such as Hershey (NYSE: HSY) have managed to contain some of their input costs and pass the rest of the cost along to customers, Tootsie Roll Industries isn't quite positioned to do the same. So something's got to give before this stock's a healthy "buy" again.
Risks to Consider: Companies can and sometimes do dig themselves out of holes, and analysts eventually change their minds. As unlikely as a lightning-fast switch could be in any these cases, traders should be prepared for all contingencies.
Action to Take --> Nothing lasts forever, and the excessive risks associated with all three of these stocks may eventually fade, with the companies righting their respective ships and value being re-created. Until that time comes, though, would-be buyers should know they're facing a headwind with these three stocks. There are easier ways to make money in the market right now. In fact, if you've got the stomach for it, then you might want to consider shorting these stocks.