Source: Pixabay creative commons user harpsandflowers
Editor's Note: Todd Campbell's contribution on Clovis Oncology has been updated to reflect recent news of a data request from the FDA.
Wall Street analysts are notorious for issuing ratings on companies that don't match up with investors long term thinking and that sometimes means companies that are out of favor with analysts can be intriguing buys for long-haul portfolios.
We asked some of our top Motley Fool contributors to scour the market for companies that Wall Street dislikes and that may be worth keeping an eye on. Here are the three companies they found, why these stocks are drawing analysts' ire, and whether or not these Fools agree with Wall Street's opinion.
Andres Cardenal: Wall Street analysts are not particularly fond of Petroleo Brasileiro (PBR 1.64%), generally known as Petrobras, lately. The company has been downgraded three times since September 2015, and the stock is down almost 55% from its highs of the last year.
The company is a Brazil-based integrated energy company controlled by the Brazilian government. Petrobras is focused on exploration and production for oil and gas in Brazilian offshore fields. The company produced 2.78 million barrels of oil equivalent (BOE) a day during the first half of 2015, and proven reserves reportedly stand at 16.83 billion BOE.
Petrobras has made huge oil discoveries in deep waters over the last decade, and the company is investing tons of money to bring those resources to the market. However, this kind of production is remarkably expensive, and the big decline in oil prices over the last year is inflicting a lot of damage to profitability in this area.
Making things worse, Petrobras is highly indebted, with a debt to capital ratio above 50%. In addition, the company is involved in a series of high-profile corruption scandals affecting both high-level Brazilian government officials and executives in the private sector.
The good news is that Petrobras offers a lot of room for improvement if oil prices rebound and the company embraces better and more transparent corporate governance practices. However, until that happens, Petrobras remains a notoriously risky investment proposition.
Todd Campbell: I recently screened Starmine's equity summary score of independent analyst ratings on healthcare stocks and found that a host of healthcare companies are out-of-favor with analysts.
Many of the healthcare stocks that analysts dislike are high-risk, clinical-stage biotechnology companies, and while I agree that this industry isn't suitable for every investor, I do believe that some of the stocks that analysts rank poorly, including Clovis Oncology (CLVS), may not be as bad of a long haul bet as Wall Street thinks.
Recently, the FDA asked Clovis Oncology to provide additional information relating to rociletinib, a treatment for non-small cell lung cancer that the agency is considering approving. The request caused shares in Clovis Oncology to crash because it raises fear that an FDA decision, formerly expected by March 2016, could be delayed.
Although the FDA request could delay Clovis Oncology's plans, it doesn't mean that the regulator will balk at approving rociletinib. There's a significant need for new treatment options for use in patients that have developed resistance to front-line therapy and for that reason, I think the FDA could still give rociletinib a green light.
If it does, then rociletinib will compete with AstraZeneca's (AZN 0.28%) recently approved Tagrisso and while Tagrisso appears to offer a better response rate than rociletinib, investors should remember that this patient population is heavily pretreated and has a poor prognosis, and that means there's still a market opportunity for rociletinib.
Also, Clovis Oncology remains on track to file for approval of its ovarian cancer drug, rucaparib, a PARP inhibitor, in the next year and that means that if the FDA ends up approving rociletinib and late stage trial results confirm rucaparib's prior findings, then Clovis Oncology could end up with two oncology drugs on the market by 2017. Given that potential, I believe Clovis Oncology could be worth the risk for speculative investors; especially now that it's a whole heckuva lot cheaper than it was last week.
Tyler Crowe: There are so many energy and commodity companies that could be on this list that we don't have enough space on the page to include them all. One that really seems to get Wall Street's blood boiling recently, though, is Cliffs Natural Resources (CLF 0.77%). It's bad enough that the company's shares have declined 95% over the past five years. Even at today's share price, more than 42% of the company's shares are sold short.
One obvious reason that Wall Street is so bearish on Cliff's is the fact that the world is quite oversupplied. Not only has demand for iron ore waned as China scales back its consumption, but many of the projects intended to supply China are just coming online. Some of the bigger miners such as Vale (VALE 0.68%) and BHP Billiton (BHP 0.15%) have been increasing iron ore production over the past couple years despite the slowdown, and that has put immense pressure on iron ore prices to the point that profit margins at all of these companies are razor thin.
To add insult to injury for Cliffs, the company is trying to reverse course after some acquisition blunders in 2011. Then, the former management team tried to make a $5 billion acquisition to become a more diversified, international miner like Vale or BHP. Today, though, almost all of those assets have been written down and the company is stuck with nothing but the debt that financed it.
So the company is looking to use its one remaining profitable segment, its U.S. Iron ore production, to pull itself out from its debt woes. The market isn't doing it any favors, either, as iron ore prices remain so low. Cliff's management has a long road ahead of it to getting back to solid financial footing, but based on the bets from Wall Street, they don't think Cliff's is going to be able to pull it off.
