Looking to buy a stock? Chances are Wall Street has a favorable view of the publicly traded company you're looking to add to your portfolio.
According to data from CNBC, over 90% of all S&P 500 stock ratings from Wall Street analysts were the equivalent of "buy" or "hold" between 1997 and 2017. With the exception of short periods in 2002-2003 and 2008-2009, sell ratings have consistently accounted for only 1% to 6% of all ratings for S&P 500 companies this century.
One reason for this "buy bias" is due to the U.S. and global economy growing over time. Historically, the stock market moves higher over the long run, too. Wall Street analysts might simply be playing the favorable odds that higher-quality businesses will increase in value over time.
Additionally, The Wall Street Journal noted some years back that Wall Street analysts are hesitant to issue sell ratings so as not to burn bridges for their clients or themselves with the companies they cover. No matter the reasoning, sell ratings are rare on Wall Street.
But don't tell that to shareholders of the following three ultra-popular stocks. These are three of the 16 most-held stocks on the Robinhood ( HOOD -7.75% ) platform, and not one of them has a single buy rating from a Wall Street analyst.
One of the biggest buzzkills, according to Wall Street, is Canadian marijuana stock Aurora Cannabis ( ACB -6.39% ). Aurora, which at one time was the most-held stock on Robinhood, is being covered by 13 Wall Street institutions, seven of which rate the company the equivalent of a hold and six of which believe it's a sell.
Though Aurora Cannabis does foot the blame for a lot of this negativity, some of its issues can be traced to Canadian federal and provincial regulators failing the pot industry. For example, Ontario's lottery system to assign retail licenses through 2019 was terrible and resulted in only a few dozen dispensaries opening. Canadian pot stocks are still trying to recover from supply chain bottlenecks in the country's most populous province.
But as I mentioned, Aurora Cannabis isn't without fault. The company expanded its production capacity far beyond what was needed. At one time, it held 15 production facilities that could have yielded more than 600,000 kilos of annual cannabis output if fully operational. Management has since closed five of these smaller facilities, sold a 1-million-square-foot greenhouse that wasn't retrofitted for cannabis production, and halted construction on two of the company's largest projects.
Yet, even with this aggressive cost-cutting, Aurora Cannabis is still a long way from generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA). With the company continuing to burn cash and the previous management team grossly overpaying for about a dozen acquisitions, it's regularly had to sell its common stock to raise capital to pay its bills and fund buyouts.
Taking into account a reverse split enacted last year to stave off delisting, Aurora's share count has ballooned from about 1.3 million shares in June 2014 to 198 million shares, as of mid-May. That sort of dilution is precisely why the company's shares are down nearly 95% since March 2019.
The salt in the wound is that Canada's legal weed sales have been hitting monthly records, all while Aurora's recreational pot revenue was more than halved in its fiscal third quarter.
Yet another Canadian pot stock in the no-buy zone for Wall Street is small-cap Sundial Growers ( SNDL -9.05% ). Even though it's the fourth most-held stock on Robinhood, four of the six analysts covering the company rate it a sell.
Despite sitting on a boatload of cash, cash equivalents, and long-term investments (about $948 million), Sundial Growers has three factors working against it.
To begin with, Sundial's approach to raising capital has destroyed shareholder value. Initially, it looked as if management would sell enough common stock to simply pay off the company's outstanding debt. But in a nine-month stretch between Oct. 1, 2020 and June 30, 2021, Sundial's executives have unrelentingly issued stock to raise additional capital.
The end result is the issuance of roughly 1.5 billion shares of stock. With 2 billion shares now outstanding, Sundial has virtually no chance of ever generating meaningful earnings per share, and it'll likely struggle to remain listed on the Nasdaq exchange without a substantial reverse split.
Second, Sundial's management team hasn't laid out a concrete plan for its capital. While it did undertake a cash-and-stock deal to acquire Inner Spirit Holdings in July, and it's committed roughly $425 million to its joint venture with SAF Group, known as SunStream Bancorp, to invest in cannabis industry opportunities, the company has continued to raise cash with no stated purpose.
Third, Sundial has shifted its operating model away from wholesale cannabis to take advantage of the higher margins associated with the retail side of the equation. Unfortunately, having to start from scratch has led to significant year-over-year sales declines at a time when legal weed sales are rapidly growing.
In March I more or less referred to Sundial as the worst cannabis stock money could buy. That descriptor still holds true today.
But the most popular stock of all that's getting absolutely no love from Wall Street analysts and investment banks is movie theater chain AMC Entertainment ( AMC -15.82% ). The third most-held stock on Robinhood has nine analysts covering the company. Five of them have it rated a sell, with four others chiming in with a hold rating.
This rating distribution isn't a surprise given that Wall Street's consensus price target for AMC is $5.44. Shares of the company would need to fall 86% from where they closed last week to reach this consensus target.
The reason AMC's share price has rocketed higher in 2021 primarily has to do with retail investors piling into the stock and betting on a short squeeze -- i.e., a very short-term event whereby pessimists (short-sellers) run for the exit and buy shares to cover their positions. The issue for these optimists is that none of the data surrounding AMC is working in their favor.
For one, short squeezes typically require certain conditions be met, which simply aren't there at the moment. While the company's 18.8% short interest at the end of August is higher than most stocks, its large daily trading volume means it would take less than a day for all 95.94 million short shares to be covered. The liquidity of AMC's stock means short-sellers have no fear of being trapped in their position.
Fundamentally, the movie theater industry has been in a nearly two-decade decline. Tickets sold and inflation-adjusted gross at the box office have fallen 22% between 2002 and 2019, the last full year before the pandemic. Streaming offerings and substantially reduced film exclusivity (30 to 45 days now, compared to 75 to 90 days prior to the pandemic) bode poorly for the industry's future.
And then there's AMC's operating performance and liability-riddled balance sheet. Despite a record $2.023 billion in liquidity ($1.81 billion in cash), AMC burned through $576.5 million in cash in the first six months of 2021. Its lease liabilities are soaring, it owes $420 million in deferred rent, and it's lugging around nearly $5.5 billion in debt that it likely can't pay.
More than $1 billion in aggregate debt due in 2026 and 2027 is also valued at 70% to 74% of face value. Debt going for this much below par is a very real warning sign that bondholders believe a future default is possible.
Long story short, Wall Street has every reason to be skeptical of AMC.