Many stocks trading under $5 have limited analyst coverage, so it's never a good sign for investors when a majority of researchers recommend dumping shares.
Just as some under-$5 stocks react positively to favorable coverage, others can see their share prices negatively influenced by an analyst's bearish view.
The following 10 US stocks trade below $5 and have garnered the highest percentage of sell ratings from analysts (minimum three analysts covering the stock).
10. Level 3 Communications is an integrated communications services provider. The stock is down more than 20% over the last 12 months. On May 6, Level 3 reported an adjusted first-quarter loss of 11 cents a share, matching the Thomson Reuters average estimate. Core network services (CNS) revenue fell 1 percent from a year ago, although it increased 15 percent from the fourth quarter.
Consensus: Level 3 has wide coverage from Wall Street with 15 researchers watching the stock. Of those, seven, or 46.7 percent, suggest to investors that they sell shares. Another seven recommend holding the stock, while one lone analyst recommends buying shares. The average of five price targets on the stock is $1.34, which represents 12.6 percent upside.
Bearish Scenario: In a May 17 note to clients, Piper Jaffray analyst Christopher Larsen noted that Level 3 "has significant maturities through 2014. If the company is unable to refinance this debt it could apply pressure to the company and its share price."
Bullish Case: Jefferies analyst Anupam Palit wrote in a May 14 research note that Level 3 CFO Sunit Patel presented at the Jefferies Global Media, Internet & Telecom Conference, at which Patel reiterated the company's outlook for sequential CNS revenue growth through the rest of 2010. Jefferies' Palit did note that "more meaningful growth may be difficult to achieve without a broader recovery in the enterprise."
9. Blockbuster earlier in 2010 warned that a Chapter 11 bankruptcy filing was a possibility if cash flows don't improve and if it were unable to restructure debt of roughly $1 billion.
The movie-rental chain is in the process of trying to secure a $150 million debtor-in-possession loan, The Wall Street Journal reported earlier this month, which is sometimes arranged as a backup plan in the event that a company and its bondholders fail to strike a deal. Blockbuster is also facing a proxy battle with activist investor Gregory Meyer ahead of its annual shareholder meeting.
Consensus: Eight analysts cover Blockbuster; four recommend selling and four suggest holding shares. The average of three price targets on Blockbuster is 62 cents, more than double where the stock currently trades.
Bearish Scenario: Janney Montgomery Scott analyst Tony Wible wrote in a May 14 research note that Blockbuster's core in-store business "is showing incremental signs of improvement. However, the company's dwindling cash balance and focus on debt restructuring efforts is likely to result in significant equity dilution."
Bullish Case: Roth Capital Partners analyst Richard Ingrassia noted on May 18 that Blockbuster has a 28-day head start over rental competitors thanks to an availability advantage on certain new releases. "We believe this provides Blockbuster with a significant potential advantage, but we have yet to see the company capitalize on the opportunity," Ingrassia wrote.
8. Delta Petroleum shares are down more than 45% over the last year after a sharp decline in October 2009 after the company announced disappointing gas volume results out of the Columbia River Basin. Since then, the stock has risen on speculation it could be a buyout target following Exxon Mobil's $31 billion acquisition of XTO Energy .
Consensus: Of the analysts covering Delta Petroleum, three argue that the stock will underperform and three recommend holding shares. The lone price target on the stock is $1.40, representing 39% upside over the next 12 months.
Bearish Scenario: In a May 13 research report, Wells Fargo Securities analyst David Tameron argued that Delta Petroleum's "ability to execute should be very limited over the next 9 months, as the bank group has limited its capital expenditures to $25 million over that period. Combined with its significant debt levels and production profile which should continue to decline, we believe shares will underperform."
Bullish Case: After Delta Petroleum said in March that it had entered into a letter of intent to sell a 37.5 percent interest in a Colorado oil-and-gas property to Opon International for $400 million, KeyBanc Capital Markets analyst Jack Aydin said it "is a positive development for DPTR as it provides the capital constrained company with substantial liquidity."
7. Zale shares have plunged nearly 40% over the last year as the embattled jewelry retailer continues to struggle with the effects of the recession. Last month, Zale said it has closed on a new five-year, $150 million term loan with Golden Gate Capital. The private-equity firm will receive warrants that, if executed, would account for a 25% equity interest in Zale on a fully diluted basis.
Consensus: Four analysts covering Zale are split in their opinion; two recommend selling and two recommend holding. The average of two stock price targets on Zale shares is $2.75, 25% higher than where they currently trade.
Bearish Scenario: "In our view, the company's strategy to improve comps has yet to materialize and the near term strategy of the company is not clear given management turnover," Bank of America/Merrill Lynch analyst Rick B. Patel wrote of Zale in a May 26 research note. "Additionally, the company has considerable debt on its balance sheet, which creates a drag to improving earnings."
Bullish Case: Soleil Securities analyst Jeffery Stein, who has a hold rating on the stock, wrote on May 26 that "we still know very little regarding the company's marketing plans for the upcoming holiday season, which we believe will be crucial to delivering improved results."
6. Himax Technologies is a developer of semiconductors for flat panel displays. The stock hit a 52-week low of $2.16 in November 2009 days after the company offered disappointing guidance for the fourth quarter of 2009. In May, Himax reported first-quarter revenue of $175.5 million, which fell short of the Thomson Reuters average estimate of $184.2 million.
Consensus: Two analysts covering the stock say that Himax shares should underperform, while another two suggest holding shares. The average of three price targets on Himax is $3.18, which is pennies above where the stock currently trades.
Bearish Scenario: Chardan Capital Markets managing director Jay Srivatsa wrote in a May 6 research note that "with continued shortages and company revealing that capacity tightness may be a mid-long term trend, we remain cautious on the growth in the display driver business."
Bullish Case: Bank of America/Merrill Lynch analyst Daniel Heyler wrote on May 6 that "long-term fundamentals appear solid," although he conceded that near-term headwinds are formidable. Those include capacity constraints, rising packaging costs, share loss and limited contribution from new businesses, Heyler wrote.
5. YRC Worldwide is the transportation giant that narrowly avoided disaster by extending a debt-for-equity offer six times before noteholders tendered $470 million in debt on Dec. 31, 2009. The threat of bankruptcy knocked the stock from nearly $6 in September 2009 to less than a quarter currently. Last week, YRC Worldwide said it has amended a credit facility that had only $22 million left to borrow. However, the trucker added that high business costs are still putting a strain on liquidity.
Consensus: Of the 13 firms with a rating on YRC Worldwide, seven, or 53.9%, say that investors should sell the company's shares. Five recommend holding shares and another maintains a buy rating. Two firms have a price target of 50 cents, which is more than double where YRC Worldwide shares currently trade.
Bearish Scenario: YRC Worldwide's cash burn concerns Credit Suisse analyst Christopher Ceraso, according to his research note published on May 5. "Although the situation appears to be improving, there is virtually not likely to be much residual cash flow once pension contributions restart and capex gets back to normal. And if cash flow does eventually improve, we suspect the value will accrue to the Teamsters or the banks, not YRCW common equity holders."
Bullish Case: Deutsche Bank analyst Justin Yagerman wrote in a May 9 research note that he sees significant operating leverage potential in YRC's model, although he remains on the sidelines "given limited visibility and lingering question marks," including how the company will be able to begin paying pension and interest expense (both currently being deferred) and repay its various IOUs.
4. The Phoenix Companies is a life insurance and annuity products provider. Shares of Phoenix took a hit in November 2009 after Fitch Ratings downgraded rating on the company's life insurance subsidiaries. The ratings agency cited ongoing concerns about the company's strategic direction and the impact on its long-term credit profile. The stock rebounded in April on market chatter the company is a potential takeover target
Consensus: Four analysts, or 57.1 percent of those covering the stock, advise investors to sell shares of the Phoenix Companies. One firm has a hold recommendation, and two others suggest that investors buy the stock. The average of three price targets on the company is $4.83, more than double the current share price.
Bearish Scenario: Barclays Capital analyst Eric Berg wrote on May 5 that "it's possible that, given the dissatisfaction that Phoenix appears to have left both in its employee ranks and the ranks of its distributors, Phoenix could go for an extended period — more than a year, perhaps — without a ratings upgrade."
Bullish Case: Following Phoenix's first-quarter results, Credit Suisse analyst Thomas Gallagher said he was encouraged by the increase in statutory capital and liquidation value, although he did not raise his $3.50 target price because the increase was driven by deferred tax assets and mark to market on below investment grade securities "and not largely earnings driven."
3. Poniard Pharmaceuticals shares have plunged more than 80 percent over the last year. The stock fell off of a cliff in November 2009 after the company's picoplatin treatment for colorectal cancer failed to meet its goal in a phase III clinical trial. In March, Poniard said it has engaged Leerink Swann to conduct a review of strategic alternatives, including capital raising alternatives, merger, sale or partnership
Consensus: Of the analysts covering Poniard, three, or 60 percent, argue that the stock will underperform. One analyst recommends holding shares, while another recommends buying the stock. The average of four price targets on Poniard is $1.38, which implies upside of 72.5 percent.
Bearish Scenario: Canaccord Genuity analyst George Farmer on May 14 reiterated his sell rating on Poniard, arguing that "Poniard will not be able to find a partner required to advance picoplatin into additional Phase III trials."
Bullish Case: While BMO Capital Markets analyst Jason Zhang acknowledged there is no clear regulatory path and a lack of visibility in partnership efforts/strategic alternatives, he continues "to believe that picoplatin has a promising clinical profile."
2. Jackson Hewitt Tax Service shares are down 70 percent in 2010 after the tax preparer lost its refund application loan, or RAL, product in 50 percent of its shops after learning it had commitments for only half the funds it had last year to offer refund anticipation loans for 2010's tax season. In May, Jackson Hewitt said 2010 prepared tax returns declined by 14.4 percent to 2.53 million, which was below Jackson Hewitt's previous estimate of a decline of 17 percent to 19 percent.
Consensus: Three analysts, or 60% of those covering the stock, recommend selling share of Jackson Hewitt. The other two suggest that investors hold shares. The average of two price targets is $1.50, which is slightly above where Jackson Hewitt shares currently trade.
Bearish Scenario: Millman Research Associates' Michael Millman wrote in a May 27 research note that 2011 could be weaker yet for Jackson Hewitt, "with declining tax returns prepared, revenues and earnings. We see little light at the end of the tunnel. We continue to expect significant risk to the downside."
Bullish Case: Oppenheimer analyst Scott Schneeberger on May 28 wrote that relative to conservative expectations, "[fiscal year 2010] tax season metrics and financial guidance were solid and merit a positive knee-jerk reaction. However, uncertainty continues to loom large over "[fiscal year 2011] and JTX remains a 'show me' story."
1. Hovnanian may have the most sell ratings, but the stock is up more than 80 percent over the last 12 months and more than 5 percent in 2010. Hovnanian shares were hit hard in early June after the homebuilder reported second-quarter revenue of $318.6 million, which was down nearly 20 percent from a year ago and below the $352 million consensus of analysts.
Consensus: Thirteen analysts cover Hovnanian, and nine, or 69.2 percent, recommend that investors dump the homebuilder's stock. Three analysts recommend holding shares, while one firm suggests that investors buy Hovnanian. The average price target of seven analysts is $3.50, which is 11.8 percent below the current share price.
Bearish Scenario: Wells Fargo Securities analyst Carl Reichardt on June 3 wrote that the firm rates Hovnanian with an underperform rating "because of its negative equity and because we do not foresee profitability in 2011. We maintain that a combination of weak sales volumes and plentiful capital sources looking to purchase finished lots will pin down returns and make it difficult for most builders to reconstruct profitability quickly."
Bullish Case: Deutsche Bank analyst Nishu Sood on June 11 wrote that the firm "increased our margin assumptions based on the better margins that the company reported" in the second quarter. Deutsche Bank also increased its target price to $4.50 from $3.50, citing "increase due to lower liquidity risk as ascribed by the [credit-default swap] market."
Disclosure information was not available for Holmes or his company.