Stock prices fluctuate for many reasons. However, a handful of stocks can't seem to get any love from Wall Street these days. Below, three Motley Fool contributors explain why Valeant Pharmaceuticals (NYSE:BHC), Lululemon Athletica (NASDAQ:LULU), and Bofl Holdings (NASDAQ:BOFI)are three stocks that Wall Street loves to hate, and whether the bearish outlook for these stocks is justified.
Alex Dumortier (Valeant Pharmaceuticals): It's been a stunning fall from grace for Valeant Pharmaceuticals International since mid-September. For years, CEO J. Michael Pearson's "innovative" acquisition-driven strategy -- and its soaring stock price -- enchanted investors. During the five years to Aug. 5, the share price was multiplied by 11.6.
The conviction of several high-profile investors, many of them hedge funds, regarding Valeant was such that they accumulated massive positions in the stock. As recently as Nov. 8, hedge funds owned a quarter (24.9%) of Valeant's shares, the second-highest proportion of any company in America, according to Bloomberg.
However, the negative publicity garnered by some pharmaceutical companies' huge price increases (in particular, this tweet from Hillary Clinton), was the catalyst for much greater scrutiny regarding Valeant's business model and operating practices.
It did not help matters when the company disclosed a highly unusual relationship with a specialty pharmacy Philidor RX Services that was engaging aggressive sales practices. In response, investors have been selling the shares relentlessly. As of Tuesday's close, Valeant's stock was off more than two-thirds relative to its August high.
Some investors certainly have ample reason to hate the stock: Bill Ackman's Pershing Square Capital Management and Ruane Cunniff & Goldfarb have recorded billion dollar-plus paper losses on Valeant (for Pershing Square, the loss is thought to exceed $2 billion).
Not all of Wall Street hates Valeant, however; the "sell-side" (brokers and investment banks) like it, judging by equity analysts' recommendations. According to Bloomberg, the stock has 15 Buys, 7 Holds and only 1 Sell rating, with an average 12-month target price of $179.84, or more than twice the current price!
It's true that the stock has suffered three downgrades since Oct. 29, but none of them were to a Sell! Over the same period, one analyst lifted the stock to a Buy.
The sell-side manifestly believes the massive price decline has created an opportunity, but for people who already own the stock, that isn't much comfort.
As far as I'm concerned, Valeant is another example of a serial acquirer that mesmerizes Wall Street for a time until investors realize that bounding growth is no substitute for an adequate return on capital (think ITT or Ling-Temco-Vought in the 1960s, for example). Such enterprises have no place in a long-term investor's portfolio.
Tamara Walsh (Lululemon Athletica): Wall Street loves to hate athletica apparel company Lululemon. The stock is down more than 8% so far this year, with as much as 25% of the stock's outstanding shares currently sold short. This means there are plenty of investors betting against the yoga apparel company today. Lululemon faces immense competition in the fast-growing athletic apparel industry, not only from other athletic brands such as Nike and Under Armour, but also from apparel retailers including Gap and L Brands -- both of which now have successful yoga brands of their own.
These competitors have deep pockets and seemingly endless resources to which they can allocate toward "athleisure" concepts. This leaves Lululemon with a nearly non-existent competitive moat. However, Lulu does boast some positives that might keep short sellers up at night.
For starters, the athleisure wear market is growing at a breakneck pace these days and thus commands premium pricing in the retail space. This, together with the fact that Lululemon primarily sells through company owned stores, means Lulu boasts some of the highest margins in the industry. Moreover, the stock could be a short-squeeze candidate heading into earnings next month if the company is able to top analyst estimates.
As it stands, Wall Street is looking for third-quarter earnings of $0.37 per share, down from earnings-per-share of $0.42 a year ago. Nevertheless, the Street expects revenue to come in slightly higher from the year-ago period at around $481 million in the period. If Lulu can over deliver on these expectations, it could force short sellers to cover their positions and send the stock higher from here.
Brian Stoffel (BoFl Holdings): If there's one stock Wall Street has really taken a hatchet to lately, it's BofI Holdings (NASDAQ:BOFI)otherwise known as Bank of Internet. Between October 13th and the 30th, the stock fell 45%. The most recent data available from Nasdaq shows that roughly 18% of BofI shares were sold short on October 15th -- and it's likely that number has since grown.
The company's tough month got started when a former auditor filed a wrongful termination suit against BofI. While the termination was the reason for the suit, it was the details of allegedly nefarious behaviors --including money laundering and lying to federal agencies -- that spooked investors. The company held a conference call after the suit was filed, but it still left many unanswered questions.
The company has since released very positive earnings, and CEO Greg Garrabrants also made a sizable open-market purchase. That has alleviated some of the pressure on shares. In the long run, however, Wall Street needs to be convinced -- either because of a resolution of the suit, or an outside audit -- that management of the company can be trusted.
Alex Dumortier, CFA has no position in any stocks mentioned. Brian Stoffel owns shares of Lululemon Athletica. Tamara Rutter owns shares of Lululemon Athletica. The Motley Fool owns shares of and recommends BofI Holding, Lululemon Athletica, and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.