Professional analysts have more time, more data, and better access to companies than most private investors. As such, the wisdom of the City crowd is worth paying attention to, because, ultimately, you’re either going with the pros or going against them when you invest.
Right now, Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) and Royal Mail (LSE: RMG) are among the most unfavoured shares of the professional analysts.
Royal Mail
Royal Mail’s shares have risen 75% since the company’s stock market flotation less than six months ago at 330p. City experts and private investors alike thought 330p was a bargain price, and stampeded to get a slice of the pie.
However, today only a few analysts rate the shares a buy, with the majority divided between hold and sell. Credit Suisse, which initiated coverage of the company earlier this month, joined the bear camp, arguing that TNT Post, the UK arm of Dutch group Post NL, has the clout to break Royal Mail’s monopoly.
Credit Suisse’s analysts reckon Royal Mail will lose some £540m of sales within five years, “which would fall largely to the bottom line”. The analysts believe Royal Mail’s margin targets are “overly ambitious”, leaving the valuation looking “stretched” from a rating of 17 times current-year forecast earnings.
SSE
Many City experts turned bearish on utility SSE last autumn, when the political temperature on gas and electricity prices rose to new highs. Analysts at Investec said that as far as the profitability outlook is concerned, the UK’s main energy suppliers are in an “unenviable ‘lose:lose’ situation”.
Analysts at Barclays were similarly downbeat, saying a margin squeeze appears inevitable regardless of which party wins the next general election; and that if a labour government freezes energy prices as it’s promised, “this scenario would potentially trigger dividend cuts for both [Centrica and SSE] and, in SSE’s case, a rights issue”.
Most City professionals continue to see political risk as simply too high to recommend SSE’s shares as a buy, even though they’re trading at a fairly modest 12 times current-year forecast earnings, with a dividend yield of over 6%.
Royal Bank of Scotland
The majority of City experts are bearish on RBS — and not just bearish, but very bearish with ‘strong sell’ dominating the ratings. Annual results from the taxpayer-owned bank on 27 February only confirmed for the bears their view that the market has been valuing the state-owned bank too highly.
Deutsche Bank’s analysts pretty much summed up the bear position, saying “RBS looks expensive on 10-12x 2-3 year forward earnings and 1.0x restructured TNAV [tangible net asset value]“ given:
- the execution risks
- lack of near term earnings
- lack of dividend
- lower-than-peer capital strength
- 80% government share overhang
- significant ongoing litigation exposure from the legacy Markets business
The latest bearish analyst move came from Canadian broker RBC Capital, which yesterday announced a much reduced price target of 250p (from 310p), saying a return above the cost of equity is many years out.