11 Major Risks for Value Investors With Stocks at All-Time Highs

4. Beware When Dividends Are Too High Versus Peers.

Many stocks have large numbers of investors who are solely focused on the dividends or distributions. After years of tracking telecom, master limited partnerships (MLPs) and other high sectors that have high payout ratios of income or cash flow, we can tell that if a company’s dividend exceeds earnings and distributable cash flows per share then it is being funded from somewhere else. Maybe it is taking on debt or eating into its cash from past years. Or maybe it is cash from a one-time event like a unit-sale or asset sale. Regardless, companies with high dividend (and distribution) yields often find themselves in the middle of a short seller war. If companies like AT&T and Verizon have yields of 4% to 6% already, telecom and communications carriers yielding 8% to 10% likely come with much more risk. If a typical utility stock yields 3.5%, then yields of 5% or 6% may have more risks from earnings, regulation or other business issues.

The biggest risk about high dividends and distributions is when they have to be cut or eliminated. If investors think a stock looks cheap because of a high dividend, they are likely to be stunned when they see what happens to the share price after a dividend is lowered or eliminated. It can be a very painful lesson.

5. Accounting Concerns (or a Going Concern).

If a company is “cheap” in a screen because it has accounting concerns, investors better understand that they probably do not and cannot really understand what they are getting into. If the term “accounting irregularities” is seen, these companies might have problems for many years. They often get the dreaded “earnings restatements,” in which years of earnings history has to be reworked, and shareholders generally get hurt in those situations.

Then there is the “going concern” note from an auditing firm, where the firm says a business has a risk as a going concern. That means a company may not be viable, or that if it does not turn its ship around it is doomed.

These accounting situations have something in common to when you walk in your kitchen at night and see a roach on the counter. What are the odds that this is the only roach in the house?

6. Watch Out When Analysts Keep Their Bullish Thesis for Too Long.

Analysts may be smart in general, and they may have high knowledge of their fields. Unfortunately, many analysts expect too much from companies they cover. They often just assume that things will always be good ahead, even when business interruptions get in the way of investor gains. Sometimes stocks will drop 20%, 30%, 50% or more, and it is common to see analysts react by maintaining Buy or Outperform ratings even as they lower their formal price targets. Sometimes they remain positive even after cutting their earnings and/or price targets multiple times. This is often a very bad sign. There are of course exceptions, but it can mean that there is more hope and promise to their bullish thesis than there is meat.

In many value investing cases, the lesson about analysts being too bullish should also mean that investors should not universally trust analyst earnings and revenue estimates. This plays deeper into the lesson of there being more than a P/E and PEG Ratio to the value story. Many value stocks have a big chance of disappointing investors around earnings and other planned corporate news. Again, they look “cheap” for a reason. Major growth drivers do not grow endlessly (think about drug sales, new phone launches, new food trends, etc.).

Just like the rest of us, analysts hate to admit being wrong. Also keep in mind that at almost all times there are more Buy or Outperform analyst ratings on Wall Street than there are Hold, Neutral, Sell and Underweight analyst ratings combined.

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