The stocks in this article have caught Wall Street’s attention in a big way, with price targets implying returns above 20%. But investors should take these forecasts with a grain of salt because analysts typically say nice things about companies so their firms can win business in other product lines like M&A advisory.
Unlike the investment banks, we created StockStory to provide independent analysis that helps you determine which companies are truly worth following. That said, here are three stocks where Wall Street’s estimates seem disconnected from reality and some better opportunities to consider.
Covista (CVSA)
Consensus Price Target: $156.25 (27% implied return)
Formerly known as DeVry Education Group, Covista (NYSE: CVSA) is a global provider of workforce solutions and educational services.
Why Do We Steer Clear of CVSA?
- Lackluster 15.2% annual revenue growth over the last five years indicates the company is losing ground to competitors
- Projected 3.8 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Low returns on capital reflect management’s struggle to allocate funds effectively
Covista’s stock price of $123.04 implies a valuation ratio of 14.4x forward P/E. Check out our free in-depth research report to learn more about why CVSA doesn’t pass our bar.
Merit Medical Systems (MMSI)
Consensus Price Target: $89.55 (47.7% implied return)
Founded in 1987 and now offering over 1,700 patented products across global markets, Merit Medical Systems (NASDAQ: MMSI) manufactures and markets specialized medical devices used in minimally invasive procedures for cardiology, radiology, oncology, critical care, and endoscopy.
Why Are We Cautious About MMSI?
- Modest revenue base of $1.54 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Merit Medical Systems is trading at $60.64 per share, or 14.8x forward P/E. Read our free research report to see why you should think twice about including MMSI in your portfolio.
Ally Financial (ALLY)
Consensus Price Target: $54.01 (31.8% implied return)
Born from the former GMAC (General Motors Acceptance Corporation) and rebranded in 2010, Ally Financial (NYSE: ALLY) operates a digital-first bank offering auto financing, insurance, mortgage lending, and investment services to consumers and commercial clients.
Why Do We Avoid ALLY?
- 2.7% annual revenue growth over the last two years was slower than its financials peers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 4.8% annually while its revenue grew
- High net-debt-to-EBITDA ratio of 8× could force the company to raise capital on unfavorable terms if market conditions deteriorate
At $40.99 per share, Ally Financial trades at 7.5x forward P/E. To fully understand why you should be careful with ALLY, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
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