Wall Street is overwhelmingly bullish on the stocks in this article, with price targets suggesting significant upside potential. However, it’s worth remembering that analysts rarely issue sell ratings, partly because their firms often seek other business from the same companies they cover.
At StockStory, we look beyond the headlines with our independent analysis to determine whether these bullish calls are justified. That said, here is one stock likely to meet or exceed Wall Street’s lofty expectations and two where analysts may be overlooking some important risks.
Two Stocks to Sell:
The Honest Company (HNST)
Consensus Price Target: $3.87 (74.6% implied return)
Co-founded by actress Jessica Alba, The Honest Company (NASDAQ:HNST) sells diapers and wipes, skin care products, and household cleaning products.
Why Should You Dump HNST?
- Modest revenue base of $383.1 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- 13.2 percentage point decline in its free cash flow margin over the last year reflects the company’s increased investments to defend its market position
- Push for growth has led to negative returns on capital, signaling value destruction
The Honest Company is trading at $2.22 per share, or 20.3x forward P/E. Read our free research report to see why you should think twice about including HNST in your portfolio.
The Pennant Group (PNTG)
Consensus Price Target: $37.50 (25% implied return)
Spun off from The Ensign Group in 2019 to focus on non-skilled nursing healthcare services, Pennant Group (NASDAQ:PNTG) operates home health, hospice, and senior living facilities across 13 western and midwestern states, serving patients of all ages including seniors.
Why Does PNTG Worry Us?
- Declining admissions over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Modest revenue base of $842.2 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Poor free cash flow margin of 1.4% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
The Pennant Group’s stock price of $30.01 implies a valuation ratio of 22.8x forward P/E. Dive into our free research report to see why there are better opportunities than PNTG.
One Stock to Buy:
Napco (NSSC)
Consensus Price Target: $49.67 (14.4% implied return)
Protecting everything from schools to government facilities since 1969, Napco Security Technologies (NASDAQ:NSSC) manufactures electronic security devices, access control systems, and communication services for intrusion and fire alarm systems.
Why Is NSSC a Good Business?
- Market share has increased this cycle as its 14% annual revenue growth over the last five years was exceptional
- Robust free cash flow margin of 19.3% gives it many options for capital deployment, and its improved cash conversion implies it’s becoming a less capital-intensive business
- Returns on capital are growing as management capitalizes on its market opportunities
At $43.41 per share, Napco trades at 28.8x forward P/E. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
High-Quality Stocks for All Market Conditions
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