In this article, we will discuss the 10 dividend paying stocks you should avoid according to Morgan Stanley’s quant screen.
Morgan Stanley’s Sherry Paul: “It’s a Buying Opportunity for Many People”
Morgan Stanley’s senior portfolio manager Sherry Paul thinks the current market holds “a buying opportunity for many people”. Sherry Paul appeared on CNBC’s ‘Squawk Box’ to discuss her market forecasts and how investors should position their portfolios given the current market situation. Here are some comments:
“I think we’re at a crucial moment where we really need to get investors out of the old party scene of the Fed and into the new party of forward-thinking around profits and earnings. And step out of the economics of the politicized bond market and really take a look at what the opportunities are in the signs of the stock market which always tells us that ‘winners become losers and losers become winners’. We are in a market reset right now. We have got 11 sectors of the S&P 500, and 30% of stocks on the market have already retested their lows. Regardless of the debate around the broader market retesting lows, it’s a buying opportunity for many people and if I had a choice between stepping into the politics of the bond market or capitalism in the stock market, I’ll take the stock market every day…”
Sherry Paul discussed how investors should recalibrate their portfolios to suit them better to the current stock market situation. Here is how she thinks investors should align their portfolios:
“You want to barbell your portfolio towards value, present value cash flows, and then anchor the far end of your portfolios against, what I call, idea maturation. Centered on innovation but present value cash flows, moving from dividend payers-not enough, we have got to move to dividend growers on the front end of our portfolios and then center within sectors. Separating them, like staples, tech staples versus tech innovators, healthcare staples versus healthcare innovators, and further sort of delineate that within your sector choices.”
On September 19, Morgan Stanley ran quantitative tests to identify dividend paying stocks to avoid moving forward, according to analyst forecasts and research. The Wall Street giant used its machine learning models to identify dividend stocks with the least attractive risk/reward and most downside moving forward. The model compared each stock’s downside to its price targets, expected dividend yields, bull-bear spread, and trailing twelve-month volatility to accurately calculate risk and reward ratios. Morgan Stanley analysts then studied the model’s predictions and reviewed its selections individually as well to determine which dividend stocks should be avoided moving forward. According to Morgan Stanley, some of the dividend paying stocks to avoid right now include Lithia Motors, Inc. (NYSE:LAD), eBay Inc. (NASDAQ:EBAY), and Brown-Forman Corporation (NYSE:BF).
Our Methodology
To determine the 10 dividend stocks to avoid according to Morgan Stanley, we reviewed the bank’s list and narrowed down our selection to stocks that the firm categorically labelled as “to avoid” in its selection.
10. Kohl’s Corporation (NYSE:KSS)
Dividend Yield as of September 27: 7.60%
Total Expected Return: -30%
Number of Hedge Fund Holders: 40
Kohl’s Corporation (NYSE:KSS) is an American retailer of apparel, footwear, accessories, beauty, and home products. On August 18, the company announced earnings for the fiscal second quarter of 2023. The company reported earnings per share of $1.11 and missed estimates by $0.01 and generated a revenue of $3.86 billion, missing estimates by $42 million. As of September 27, Kohl’s Corporation (NYSE:KSS) has lost more than 48.5% of its value year to date and Morgan Stanley analysts expect the stock to go down by an additional 30% in the coming months.
On September 15, Jefferies analyst Ashley Helgans downgraded Kohl’s Corporation (NYSE:KSS) to Hold from Buy and slashed her price target to $29 from $40. This September, JPMorgan analyst Matthew Boss revised his price target on Kohl’s Corporation (NYSE:KSS) to $30 from $28 and maintained a Neutral rating on the shares.
As of September 27, Kohl’s Corporation (NYSE:KSS) is offering a forward dividend yield of 7.60% and has negative free cash flows of $929 million.
At the close of Q2 2022, 40 hedge funds were long Kohl’s Corporation (NYSE:KSS) and held stakes worth $593 million in the company. This is compared to 42 positions in the previous quarter with stakes worth $789 million. The hedge fund sentiment for the stock is negative.
As of June 30, HG Vora Capital Management owns 3 million shares of Kohl’s Corporation (NYSE:KSS) and is the leading shareholder in the company.
9. American Eagle Outfitters, Inc. (NYSE:AEO)
Dividend Yield as of September 27: 7.03%
Total Expected Return: -28%
Number of Hedge Fund Holders: 29
American Eagle Outfitters, Inc. (NYSE:AEO) is a leading retailer of clothing, accessories, and personal care products. The company sells its products under two brands: American Eagle and Aerie. At the end of the second quarter of 2022, 29 hedge funds disclosed ownership of stakes in American Eagle Outfitters, Inc. (NYSE:AEO). These funds held collective stakes of $384 million in the company, down from $665 million in the previous quarter when 27 hedge funds were bullish on the company.
On September 7, American Eagle Outfitters, Inc. (NYSE:AEO) announced earnings for the second quarter of fiscal 2023. The company reported earnings per share of $0.04 and missed expectations by $0.10. The company reported a revenue of $1.20 billion and beat revenue expectations by $1.1 million. As of September 27, the stock has tanked more than 60% year to date, and Morgan Stanley analysts expect American Eagle Outfitters, Inc. (NYSE:AEO) to shed an additional 28% moving forward.
On September 8, Citi analyst Paul Lejuez cut his price target on American Eagle Outfitters, Inc. (NYSE:AEO) to $10 from $13 and maintained a Neutral rating on the shares. This September, Cowen analyst Jonna Kim lowered his price target on American Eagle Outfitters, Inc. (NYSE:AEO) to $11 from $13 and reiterated a Market Perform rating on the shares. As of September 27, the stock is offering a forward dividend yield of 7.03% and has negative free cash flows of $199 million.
As of June 30, Select Equity Group owns more than 17 million shares of American Eagle Outfitters, Inc. (NYSE:AEO) and is the most prominent investor in the company.
Like Lithia Motors, Inc. (NYSE:LAD), eBay Inc. (NASDAQ:EBAY), and Brown-Forman Corporation (NYSE:BF), American Eagle Outfitters, Inc. (NYSE:AEO) is one of the dividend stocks investors should avoid right now according to Morgan Stanley’s quant screen.
8. United Parcel Service, Inc. (NYSE:UPS)
Dividend Yield as of September 27: 3.70%
Total Expected Return: -26%
Number of Hedge Fund Holders: 38
Wall Street analysts are bearish on United Parcel Service, Inc. (NYSE:UPS). On August 22, Evercore ISI analyst Jonathan Chappell downgraded United Parcel Service, Inc. (NYSE:UPS) to In Line from Outperform and reiterated his $214 price target. This September, Barclays analyst Brandon Oglenski slashed his price target on United Parcel Service, Inc. (NYSE:UPS) to $180 from $200 and maintained an Equal Weight rating on the shares.
As of September 27, United Parcel Service, Inc. (NYSE:UPS) is offering a forward dividend yield of 3.70% and has lost 23.4% year to date. Morgan Stanley analysts expect United Parcel Service, Inc. (NYSE:UPS) to further lose 26% of its value over the next couple of quarters.
Insider Monkey spotted United Parcel Service, Inc. (NYSE:UPS) on 38 investment portfolios at the close of Q2 2022. The total stakes of these hedge funds amounted to $613 million. This is compared to 50 positions in the preceding quarter with stakes worth $1.09 billion. The hedge fund sentiment for the stock is negative.
As of June 30, Adage Capital Management is the most prominent shareholder in United Parcel Service, Inc. (NYSE:UPS) with stakes worth $139 million.
Here is what Mayar Capital had to say about United Parcel Service, Inc. (NYSE:UPS) in its second-quarter 2022 investor letter:
“UPS has been a beneficiary of the pandemic-related shift to e-commerce. Revenues increased 15% in the year, with strong leverage in the business boosting operating profit by al- most 67%. Management is focusing on a ‘Better not Bigger’ strategy for the business and divested the UPS Freight business early in the year. Mean- while, the company is expected to increase distributions to shareholders in 2022, from both dividends and share buybacks.”
7. Watsco, Inc. (NYSE:WSO)
Dividend Yield as of September 27: 3.48%
Total Expected Return: -26%
Number of Hedge Fund Holders: 25
Watsco, Inc. (NYSE:WSO) operates in the HVAC industry and distributes air conditioning, heating, refrigeration equipment, and related parts and supplies. As of September 27, Watsco, Inc. (NYSE:WSO) has lost 16.5% year to date and Morgan Stanley expects the stock to tank an additional 26% over the next couple of months. As of June 16, Morgan Stanley analyst Joshua Pokrzywinski has an Underweight rating and a $207 price target on Watsco, Inc. (NYSE:WSO).
While Morgan Stanley analysts are bearish on Watsco, Inc. (NYSE:WSO) and see the stock suffering, Wall Street analysts are more positive. On August 17, Deutsche Bank analyst Joe Ahlersmeyer started coverage of Watsco, Inc. (NYSE:WSO) with a Hold rating and a $311 price target. As of September 27, Watsco, Inc. (NYSE:WSO) is offering a forward dividend yield of 3.48%.
At the end of Q2 2022, 25 hedge funds were long Watsco, Inc. (NYSE:WSO) and held stakes worth $257 million in the company. This is compared to 22 positions in the previous quarter with stakes worth $334 million. As of June 30, Markel Gayner Asset Management is the leading shareholder in Watsco, Inc. (NYSE:WSO) with stakes worth $105 million in the company.
In addition to Watsco, Inc. (NYSE:WSO), Morgan Stanley analysts see material downside to Lithia Motors, Inc. (NYSE:LAD), eBay Inc. (NASDAQ:EBAY), and Brown-Forman Corporation (NYSE:BF) over the next couple of quarters.
6. Caterpillar Inc. (NYSE:CAT)
Dividend Yield as of September 27: 2.92%
Total Expected Return: -23%
Number of Hedge Fund Holders: 45
On August 2, Caterpillar Inc. (NYSE:CAT) announced earnings for the fiscal second quarter of 2022. The company reported earnings per share of $3.18 and beat estimates by $0.16. The company generated a revenue of $14.25 billion for the quarter and missed expectations by $135.8 million. As of September 27, the stock has declined by 22% year to date and Morgan Stanley expects it to go down further by 23%.
On August 3, Bernstein analyst Chad Dillard downgraded Caterpillar Inc. (NYSE:CAT) to Market Perform from Outperform and reiterated his $195 price target. This August, Wells Fargo analyst Seth Weber slashed his price target on Caterpillar Inc. (NYSE:CAT) to $205 from $230 and maintained an Equal Weight rating on the shares. As of September 27, the stock is offering a forward dividend yield of 2.92%.
Insider Monkey identified 45 hedge funds that held stakes in Caterpillar Inc. (NYSE:CAT) at the end of the second quarter of 2022. The total value of these stakes amounted to $3.25 billion, down from $4 billion a quarter ago with 54 positions. The hedge fund sentiment for the stock is negative.
As of June 30, Fisher Asset Management is the most prominent shareholder in Caterpillar Inc. (NYSE:CAT) and has stakes worth $1.34 billion in the company. The investment covers 0.94% of Ken Fisher’s 13F portfolio.
Here is what Diamond Hill Capital had to say about Caterpillar Inc. (NYSE:CAT) in its first-quarter 2022 investor letter:
“We also initiated a position in Caterpillar (NYSE:CAT), one of the world’s leading manufacturers of construction and mining equipment. It’s a company we know well, as we have owned it in our large cap portfolio for quite some time. Recent share price weakness provided an opportunity for us to add it to our large cap concentrated portfolio at an attractive discount to our estimate of intrinsic value. We believe Caterpillar stands to benefit from increased capital investment supported by a healthier/recovering end market environment, particularly in construction and mining.”
5. Sonic Automotive Inc. (NYSE:SAH)
Dividend Yield as of September 27: 2.29%
Total Expected Return: -40%
Number of Hedge Fund Holders: 20
Sonic Automotive, Inc. (NYSE:SAH) is an American automotive retailer. The company operates through two segments: Franchised Dealerships and EchoPark. As of September 27, Sonic Automotive Inc. (NYSE:SAH) has declined 8.43% year to date, and Morgan Stanley expects the stock to shed an additional 40% over the next couple of quarters.
On September 9, BofA analyst John Murphy double downgraded Sonic Automotive Inc. (NYSE:SAH) to Underperform from Buy and slashed his price target to $71 from $82. The analyst noted that he sees a high probability of supply chain issues negatively impacting auto volumes into 2023. As of September 27, the stock is offering a forward dividend yield of 2.29% and has free cash flows of $353 million.
At the end of Q2 2022, 20 hedge funds held stakes in Sonic Automotive Inc. (NYSE:SAH). The total value of these stakes amounted to $92 million, down from $100 million in Q1 2022 with 23 positions. As of June 30, Teewinot Capital Advisers is the top shareholder in the company with stakes worth $21 million.
4. Penske Automotive Group, Inc. (NYSE:PAG)
Dividend Yield as of September 27: 1.95%
Total Expected Return: -22%
Number of Hedge Fund Holders: 22
Penske Automotive Group, Inc. (NYSE:PAG) is a leading automotive retailer in the United States. The company has four business divisions: Retail Automotive, Retail Commercial Truck, Other, and Non-Automotive Investments. As of September 27, the stock is offering a forward dividend yield of 1.95% and has free cash flows of $959 million.
On July 14, Morgan Stanley analyst Adam Jonas cut his price target on Penske Automotive Group, Inc. (NYSE:PAG) to $93 from $95 and reiterated an Underweight rating on the shares. As of September 27, Penske Automotive Group, Inc. (NYSE:PAG) has lost 4.55% year to date, and Morgan Stanley analysts expect the stock to decline by an additional 22% moving into 2023.
At the close of Q2 2022. 22 hedge funds were long Penske Automotive Group, Inc. (NYSE:PAG) and held stakes worth $235.6 million in the company. As of June 30, AQR Capital Management is the top shareholder in the company and owns roughly 0.6 million shares.
3. Group 1 Automotive, Inc. (NYSE:GPI)
Dividend Yield as of September 27: 1.03%
Total Expected Return: -23%
Number of Hedge Fund Holders: 24
Group 1 Automotive, Inc. (NYSE:GPI) sells new and used cars, light trucks, and vehicle parts, in the United States and the United Kingdom. On September 9, BofA analyst John Murphy slashed his price target on Group 1 Automotive, Inc. (NYSE:GPI) to $358 from $375 but maintained a Buy rating on the shares. This July, Morgan Stanley analyst Adam Jonas cut his price target on Group 1 Automotive Inc. (NYSE:GPI) to $142 from $160 and reiterated a sell-side Underweight rating on the shares.
As of September 27, Group 1 Automotive, Inc. (NYSE:GPI) has tumbled 21.40% year to date and is offering a forward dividend yield of 1.03%. Morgan Stanley sees the stock losing an additional 23% over the next couple of months. Group 1 Automotive, Inc. (NYSE:GPI) has free cash flows of $724.9 million as of September 27.
Insider Monkey spotted Group 1 Automotive, Inc. (NYSE:GPI) on 24 investment portfolios at the close of Q2 2022. The total stakes of these hedge funds amounted to $195 million. As of June 30, Lakewood Capital Management is the leading shareholder in the company with stakes worth $55 million.
2. FactSet Research Systems Inc. (NYSE:FDS)
Dividend Yield as of September 27: 0.91%
Total Expected Return: -23%
Number of Hedge Fund Holders: 30
On September 22, FactSet Research Systems Inc. (NYSE:FDS) announced earnings for the fourth quarter of fiscal 2022. The company reported earnings per share of $3.13 and missed expectations by $0.08. The company generated a revenue of $499.3 million and outperformed consensus by $11.35 million. As of September 27, FactSet Research Systems Inc. (NYSE:FDS) has lost 18% year to date, and Morgan Stanley’s quant screen shows the stock can decline a further 23% in the coming months.
This September, Stifel analyst Shlomo Rosenbaum reiterated a Hold rating and his $415 price target on FactSet Research Systems Inc. (NYSE:FDS). On September 23, Deutsche Bank analyst Faiza Alwy slashed her price target on FactSet Research Systems Inc. (NYSE:FDS) to $483 from $507 and maintained a Buy rating on the shares.
As of September 27, FactSet Research Systems Inc. (NYSE:FDS) is offering a forward dividend yield of 0.91% and has free cash flows of $487 million.
At the close of Q2 2022, 30 hedge funds disclosed ownership of stakes in FactSet Research Systems Inc. (NYSE:FDS). These funds held collective stakes of $399 million in the company. This is compared to 34 positions in the previous quarter with stakes worth $544 million.
As of June 30, Echo Street Capital Management is the largest shareholder in FactSet Research Systems Inc. (NYSE:FDS) with stakes worth $144 million.
Here is what Baron Funds had to say about FactSet Research Systems Inc. (NYSE:FDS) in its second-quarter 2022 investor letter:
“The businesses in which we have invested have generally continued to report robust financial results despite elevated public attention on the risks of a slowdown. In June, market data vendor FactSet Research Systems Inc. (NYSE:FDS) reported an acceleration in its organic growth rate to 10.1%, its fastest rate of organic growth in a decade. FactSet is reaping the benefits of a multi-year investment cycle and unwavering focus on customer service to bring new products to market, consolidate spending from competitors, and realize price increases.”
1. Lithia Motors, Inc. (NYSE:LAD)
Dividend Yield as of September 27: 0.73%
Total Expected Return: -20%
Number of Hedge Fund Holders: 40
Lithia Motors, Inc. (NYSE:LAD) is a leading American retailer of automobiles and auto parts. The company operates through three segments: Domestic, Import, and Luxury. As of September 27, Lithia Motors, Inc. (NYSE:LAD) has lost 24.15% of its value year to date, and Morgan Stanley see an additional 20% downside to the stock moving ahead.
On July 14, Morgan Stanley analyst Adam Jonas slashed his price target on Lithia Motors, Inc. (NYSE:LAD) to $220 from $260 and maintained a sell-side Underweight rating on the shares. On September 9, BofA analyst John Murphy lowered his price target on Lithia Motors, Inc. (NYSE:LAD) to $470 from $565 and reiterated a Buy rating on the shares. As of September 27, the stock is offering a forward dividend yield of 0.73% and has negative free cash flows of $20.9 million.
Insider Monkey identified 40 hedge funds that held stakes in Lithia Motors, Inc. (NYSE:LAD) at the end of the second quarter of 2022. The total value of these stakes amounted to $2.01 billion, down from $2.55 billion a quarter ago with 46 positions. The hedge fund sentiment for the stock is negative.
As of June 30, Abrams Capital Management owns more than 2.3 million shares of Lithia Motors, Inc. (NYSE:LAD) and is the largest shareholder in the company. The investment covers 17.36% of David Abrams’ 13F portfolio.
Here is what Oakmark Funds had to say about Lithia Motors, Inc. (NYSE:LAD) in its first-quarter 2022 investor letter:
“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors (NYSE:LAD) is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”
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