Every day Wall Street analysts issue buy or sell ratings on companies they cover, and investors tend to eat these ratings up as Wall Street analysts are perceived to have far more knowledge in the sector they cover than the average investor. However, that doesn't always mean their stock ratings make a lot of sense.
With that in mind, we asked three of our top analysts to share a Wall Street "strong buy" rating that simply doesn't make sense to them. Here's what they had to say.
I hope you're sitting down for this, because based on Wall Street's current recommendations Japanese electronics company Sony (NYSE:SNE) is a strong buy. That's right, the same Sony that's produced nearly 10 straight years of television division losses and delivered a record $5.7 billion loss in 2012 is a "strong buy."
In February Sony announced major changes that followed the 2014 spinoff of its TV division and its exit of the PC business. Sony's management announced a renewed focus on high-growth image sensor devices and noted that it would potentially look to forge collaborations in other "innovative areas." Sony could also spinoff additional, slower growth units. The goal being to generate an operating profit of $4.2 billion and a return on equity of 10% by 2018.
But, Sony has a few major problems. For starters its brand has been washed out by China. As operating efficiencies have improved worldwide and China has undercut its Japanese electronic counterparts on price, Sony simply doesn't have as many lucrative deals at its disposable as it once did. Consumers no longer seek out the Sony brand, and until that changes I see no reason why sales of Sony should rebound.
CEO Kazuo Hirai could also be holding Sony back. Despite enacting a number of recent changes I believe Hirai waited far too long to exercise the need for change. I have a hard time seeing Sony advancing with Hirai at the helm.
Lastly, Sony is still projected to lose money this year and next year as the effects of its turnaround begin to try to take shape. In other words, there's no immediate rush to jump into Sony stock with additional losses expected.
The tobacco industry has long been a haven for dividend stocks, and although Vector Group (NYSE:VGR) isn't a household name among smokers, its discount focus gives it a dividend yield of more than 7%. The company stands behind brands like Eagle, USA, and Pyramid, as well as many private label brands for both traditional retail outlets like convenience stores and grocery stores and military commissaries. Increasingly, though, Vector has branched away from tobacco toward residential real estate, with its stake in New York City real-estate firm Douglas Elliman having taken on an increasingly important portion of Vector's overall business.
Analysts who like Vector's dividend should be aware, though, that the vast majority of the company's distributions are treated as a return of shareholder capital rather than actual taxable dividends. That is good for tax purposes, but the underlying earnings of the company aren't nearly high enough to sustain the dividend, which has been one reason why Vector's underlying debt has increased over the years. With higher interest rates posing a threat to favorable real-estate conditions and the ongoing challenges of the tobacco industry, Vector has further to go before it could qualify as a strong buy candidate.
Over the past 30 days, four different analysts have rated the medical marijuana stock GW Pharmaceuticals (NASDAQ:GWPH) a "Strong Buy," citing its ground-breaking position in a rapidly emerging market as a reason to buy shares. And while the short-term trend for GW has proven these analysts correct for the most part (shares have jumped almost 14% in the past month), I think the stock is grossly overvalued in light of its poor fundamentals and the cloudy outlook for marijuana stocks in general.
Based on its fundamentals, GW comes off as alarmingly overvalued. Shares, at present, are trading at a staggering 48-times 12-month, trailing revenue, and earnings are expected to drop another 134% this year due to rising clinical trial costs.
Making matters worse, one of the company's main product candidates, Epidiolex, is only now entering a pivotal late-stage trial in the U.S. as a potential treatment for certain forms of hard-to-treat epilepsy. And although GW did receive a much-needed shot in the arm with Epidiolex being recommended for an expanded access program that would bring the drug to severely ill patients prior to a formal approval, this early avenue to the epilepsy market is limited in nature, meaning that it won't put much of a dent in the company's monstrous valuation gap.
Topping it off, GW's flagship product, Sativex, is years away from hitting the U.S. market and overseas sales, so far, have been sluggish to say the least (less than $2 million per the last reported figures in the third-quarter of last year).
Going forward, the momentum to legalize marijuana in the U.S. is expected to allow big pharma to jump into the medical cannabis field without fear of Federal restrictions or red tape, perhaps as soon as 2016. That's a major threat to GW's near monopoly on marijuana-based therapies that investors should definitely be concerned about.
So when I look at this stock and its eye-popping $2 billion market cap, it comes off as a beneficiary of the "all-things marijuana craze" that has been gripping the stock market of late. But a deeper look suggests that this sky-high valuation is simply unwarranted, suggesting that a painful correction might be in store in the not-so-distant future.
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