Wall Street Hates These Stocks

Wall Street Hates These Stocks

It’s rare for analysts at major banks and brokerages to issue "Sell" ratings on stocks.

In fact, less than 6% of stocks had official “Sell” ratings on them according our research in A Great Way To Find "Buy Low" Stocks.

Due to a number of factors (e.g. potential conflicts of interest), analysts are often the last to move to official “Sell” ratings. 

As a result, it’s usually late in a long down cycle for a stock to get hit with this rare and dreadful rating. 

Conversely, it’s often a sign that the last holders have run out of hope, they’re selling out, and the bottom is near.

That’s why a couple of stocks that have fallen out of favor on Wall Street – both have received “Sell” ratings in the last couple weeks – could be getting positioned for sizable returns. 
 

Wall Street Piles On "Sell" Ratings

The two companies that recently got hit with “Sell” ratings are BHP Group (BHP) and Rio Tinto (RIO).

They are the second and third largest mining companies in the world with dozens of mines operating all around the world producing nearly every major mineral needed to build and sustain modern economies.

These economically sensitive companies have both bucked the market downturn though. They posted gains of 15% and 6% respectively. 

The reason for this isn’t particularly a sign of their underlying strength though. Diversified mining companies were completely left behind in the post-pandemic bubble run. 

They’re slow and steady tortoise-like behavior isn’t viewed positively by Wall Street though.

UBS, specifically, sees a different story. 

Analysts at UBS have downgraded both BHP and Rio Tinto from “Hold” to “Sell.”

The downgrade notice stated that these stocks went up "too far, too fast."

Again, these stocks  are up 15% and 6% over last year.

So too far, too fast…might be a stretch. 

UBS further added in the note: 
 

In our opinion, the macro backdrop for commodities & the miners improved in November when China started to ease Covid restrictions & announced meaningful property stimulus; this was boosted by the Fed pivot & the USD starting to weaken.

That’s a lot of factors right there. All generally bullish for mining stocks in the short-run and long-run if they continue too. 

We still do not see the reason for the extreme “Sell” rating that is reserved for 1 in every 16 major stocks. 

So we’ll look at JP Morgan, whose analysts piled on with their own downgrade of Rio Tinto to “underweight.”

Their rational focused on the growing recession in the Europe and the United States:
 

JP Morgan Strategists’ base case is for a European and US recession in 2023, but that China re-opens with 4% 2023 estimated GDP and easy macro-comps in 2023 are likely to support superior growth momentum of China versus the rest of the world.

That makes a bit more sense. 

Economies down. Commodity demand down. Mining down. 

OK. Got it.

But I’m getting a bit off track here. 

We can debate the merits of these recommendations all day. 

Our focus will be on that multiple Wall Street analysts – those which have less than 6% “Sell” ratings on all S&P 500 stocks  – have them on these two mining giants. 

That’s got to say something about how out of favor these stocks have become.

And it has us looking at the broad fundamentals to see if and when these companies could turn around. 

That’s where things get extremely interesting here. 
 

Wall Street Hates These Stocks

The future of mining – at least in the long run – is looking pretty bright. 

There are exceptions, of course, with lithium poised for a significant pullback in 2023. 

But otherwise, there haven’t been many new mines being built in the last few years and there hasn’t been much exploration for new ones either. 

That means supply hasn’t really ramped up at a time when demand could absolutely rocket higher. 

Consider this from the same consultants and advisors the big miners hire from Wood Mackenzie.

The firm asked in a recent research piece Will a lack of supply growth come back to bite the copper industry?

This chart of copper supply and demand they made answers the question:





The red line is the base case for copper demand and the blue line is the “accelerated energy transition” demand forecast. 

Depending on the scenario, copper supplies are barely keeping up demand or they’re at risk of falling far behind the needs of a rapid alternative energy transition movement. 

Either way, copper is looking anywhere between ok and great. 

The same situation is appearing across the rest of the mining sector. 

Years of underdevelopment and underinvestment have laid the foundation for long-term fading demand. 

These big miners will have their time to shine…eventually. 

But a recession could have a big impact on commodity prices and mining stocks too. 

So the big banks aren’t crazy for putting “Sell” recommendations on them here. 

But this is something you’re going to want to remember when the recession is peaking, everything looks bleak, and the miners look like they’re done forever. 

It will be another case where “Sell” ratings came within a few months of a great bottom buying opportunity.