Ratings from Wall Street analysts can be a valuable resource when trying to determine which individual stocks to buy, and which individual stocks to avoid.
However, that doesn’t mean you should follow Wall Street recommendations verbatim. It should be noted that it is in the interest of sell side analysts to lean bullish rather than bearish on stocks. This results in an overwhelming amount of analyst “buy” ratings, and a smattering of “hold” ratings, with “sell” ratings a rarity.
Also, Wall Street analysts can at times be prone to groupthink. This holds especially true, when it comes to popular stocks with momentum on their side. Nobody wants to be the odd one out providing bearish analysis on a stock that is performing well in the near-term.
With this, consider it wise to take sell-side investing advice with a grain of salt. Before deciding to buy or sell a stock, do your own research.
A good example is with these seven stocks to avoid. While overwhelmingly lauded by Wall Street, there is a solid bear case to be made with each one.
Advanced Micro Devices (AMD)
Advanced Micro Devices (NASDAQ:AMD) has clearly benefited from one of the top stock market trends of 2023. That is, investors have bid up shares in the hopes that, like rival Nvidia (NASDAQ:NVDA), this chip maker will benefit greatly from the rising use of artificial intelligence (AI) applications.
Because of its perceived high AI exposure, Wall Street analysts are also very bullish on AMD stock. According to Marketbeat, out of 29 analysts ratings, 21 rate shares a “buy,” and 8 give AMD a “hold” rating, with zero “sell” ratings.
However, unlike Nvidia, which is already benefiting from growing demand for AI chips, it’s still a work-in-progress for AMD when it comes to capitalizing on this trend. With shares zooming by more than 81% already this year on “AI mania,” you may want to do a little contrarian investing, and go against the grain with AMD.
Alibaba (NYSE:BABA), regarded as China’s equivalent to Amazon (NASDAQ:AMZN), is strongly rated by sell-side analysts. Per Marketbeat, 12 out of 13 analyst ratings on the e-commerce and cloud computing play give the stock a “buy” or “strong buy” rating.
However, despite this overwhelmingly bullish take on BABA stock, consider it one of the stocks to avoid, for two reasons. First, China’s post-Covid recovery has been lackluster thus far. This has already weighed on Alibaba shares, but if the recovery remains sluggish, it may affect the company’s results later this year. In turn, it could cause another pullback for the stock.
Second, rising political tensions between the U.S. and China may also bode badly for BABA. This too has already affected the performance of shares, yet as a Seeking Alpha commentator recently argued, this factor could continue to negatively impact the stock in the near-term, if geopolitical headwinds persist.
Given Costco’s (NASDAQ:COST) strong stock price performance over the past fifteen years, it’s no surprise that shares in the retailer are widely recommended by Wall Street’s sell side community.
Marketbeat reports that 15 out of 19 analysts covering COST stock rate it a “buy,” with the balance giving the stock a “hold” rating. Yet while these strong ratings suggest that Costco shares (after a more mixed performance since 2021) can revert back to their past winning ways, that may not necessarily be in the cards.
With sales growth falling short of expectations, even if economic conditions normalize in the coming year or two, it may prove difficult for the company to achieve the level of earnings growth currently expected by the bullish sell side. As COST trades for 37.5 times forward earnings, arguably this growth is already baked into its valuation. Falling short could lead to multiple compression.
Based on Marketbeat’s tracking of analyst ratings, Disney (NYSE:DIS) remains a favorite of Wall Street. 16 out of 19 analysts rate the media conglomerate’s shares a “buy,” with the rest rating it a “hold.”
This comes despite shifting sentiment for DIS stock amongst investors lately. As you may recall, analysts and investors aligned in their bullishness at the start of 2023, when the company conceded to demands from activist investor Nelson Peltz to aggressively cut costs and restructure.
However, even as Disney slashes costs through layoffs as well as through reduced output of content that may be causing market cannibalization, investor bullishness has tapered off. The market is more worried about the key headwinds that InvestorPlace’s Larry Ramer recently argued are hurting the company right now. The Hollywood union strikes are another issue weighing on shares. Follow the market’s lead, and consider DIS one of the stocks to sell.
Meta Platforms (META)
Since last fall, Meta Platforms (NASDAQ:META) has gone from out-of-favor, to fully in favor. Chalk this up to several factors. The Facebook and Instagram parent’s aggressive cost-cutting efforts, for one. “AI mania” has also been a booster for shares.
Excitement about Threads, Meta’s new Twitter-like application, has been a recent upward driver for shares. Yet while investors have been bullish, and the 39 out of 49 analysts rate it a “buy,” consider it one of the stocks to avoid instead right now. Why? After spiking by as much as 259% above its 52-week low, shares may be starting to correct.
Investors could be shifting to a bearish view on the stock, similar to that of InvestorPlace’s Dana Blakenhorn. Last week, Blakenhorn laid out the bear case for META stock. Namely, shares are currently overvalued, and that Threads may end up producing more headaches than upside for the company.
Uber Technologies (UBER)
Admittedly, to some degree it makes sense that analysts largely have a favorable view on Uber Technologies (NYSE:UBER). The ride-share and meal delivery giant is reportedly on the verge of finally reaching GAAP profitability.
From there, continued revenue growth could lead to exponential earnings growth. With this in mind, the fact 28 out of 28 analysts rate UBER stock a “buy” makes perfect sense. However, even as Uber’s fundamentals keep getting stronger, one can argue that these are already priced into its valuation.
Hence, UBER could at best, grow into its valuation. In other words, shares hold steady, even if earnings grow in line with expectations. At worst, shares could pull back, if earnings fall short of expectations. The sell-side may be unanimously bullish, but weighing potential risk and rewards, I say partake in some independent investing. Go contrarian, and take a bearish view on the stock instead.
At first glance, you may think it’s odd to be bearish on Walmart (NYSE:WMT). After all, WMT represents ownership in a steady, recession-resistant business, with decades of steady earnings and dividend growth.
That may explain why, despite current economic challenges, analysts by-and-large remain bullish on WMT stock. According to Marketbeat, 25 out of 30 sell-side analysts give shares a “buy” rating. Yet while Walmart is a high-quality business, and WMT is without doubt a blue-chip stock, that doesn’t necessarily make it a buy at any price.
Right now, WMT trades for 24.8 times forward earnings. Yes, the sell-side considers this a sustainable valuation, given consensus earnings growth forecasts. However, it could be difficult for this large, mature business to grow earnings so rapidly in the coming years. At risk of correcting on valuation grounds, take the view that WMT is one of the stocks to avoid.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.