Reader, beware analyst ratings. Stock analysts at the leading investment banks and broking firms may earn vast sums but they are not to be relied upon. Except maybe to get it wrong.
The 10 most tipped FTSE 100 stocks in 2018 underperformed horribly. While the index fell by 12.5%, the stocks most often rated a ‘buy’ fell by an average 17.3%.
Incredibly, only one of the top 10, pharma behemoth Shire Pharmaceuticals, made a positive return and that was largely down to the bid from Japanese pharma giant Takeda. Meanwhile, the 10 FTSE 100 stocks analysts most often rated a ‘sell’ performed better, with an average loss of 10.1%.
Tip top flop
AJ Bell investment director Russ Mould says this shows how analyst research must be treated with kid gloves and reinforces US investment legend Jim Rogers’ view that “the more certain something is, the less likely it is to be profitable.”
British American Tobacco (LSE: BATS) was the most glaring example. It was last year’s number one tip, backed by 94% of analysts, but fell hardest of all, ending the year 50% lower. I put a word in for the stock last June, and the worst of the slump has happened since then. So reader, beware me too.
Smoke and fire
I did warn that it was battling in a challenging market as smoking declines in the developing world and emerging market authorities tighten regulation, but I admired its massive cash flows, 5.4% yield and low valuation of just 12.6 times.
These look even more tempting today with the forecast yield now a dizzying 8.3%, still covered 1.5 times. British American Tobacco trades at just 7.5 times forecast earnings, with a PEG of exactly 1. So it looks an even bigger bargain.
Now here’s the really good news: analysts have gone cool on it. It is nowhere near today’s top 10 tipped stocks. Also, earnings are forecast to rise by 8% in both 2019 and 2020. It looks like a raging buy to me, but as we have learned, nobody knows anything. The best argument for British American Tobacco is that it has been one of the worst investments on the index. Tempted?
Travel specialist TUI Travel (LSE: TUI) was the second worst performer among last year’s 10 most tipped, falling 26.9%. The £6.88bn British and German travel company headquartered in Hanover, Germany, calls itself “the world’s leading tourism group”, with a portfolio of tour operators, 1,600 travel agencies and portals, six airlines, more than 380 hotels and 16 cruise liners. Clearly, size isn’t everything.
Ready to fly
Royston Wild reckons this dirt-cheap dividend stock could be due a fightback in 2019, as it extends its fleet of ships and hotels, and adds new customers at the rate of 4.7% a year. My worry is that the tourist industry could take a knock from the slowing global economy, but TUI’s earnings forecasts look promising, with anticipated growth of 19% and 12% over the next couple of years.
It trades at just 10.1 times forward earnings with a PEG of just 0.5, while the forecast yield is now 6.1% with cover of 1.7. Return on capital employed (ROCE) of 20.4 also looks healthy. TUI looks good to fly, that’s my analysis. But what do I know?
harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.