While plenty of high-yield opportunities exist, investors must always consider the safety of their dividend and the total return potential of their investment. It is not uncommon for a struggling company to suspend high-yielding dividends and subsequently result in precipitous share price declines.
TheStreet Ratings' stock rating model views dividends favorably, but not so much that other factors are disregarded. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e. how much one is willing to risk in order to earn profits?; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to its stock's performance.
These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. As always, stock ratings should not be treated as gospel — rather, use them as a starting point for your own research.
The following pages contain our analysis of 3 stocks with substantial yields, that ultimately, we have rated "Sell." Home Loan Servicing Solutions (NASDAQ: HLSS) shares currently have a dividend yield of 7.60%. Home Loan Servicing Solutions, Ltd., through its subsidiaries, engages in the acquisition of mortgage servicing assets. Its mortgage servicing assets consists of servicing advances, mortgage servicing rights, rights to mortgage servicing rights, and other related assets. The company has a P/E ratio of 13.01. The average volume for Home Loan Servicing Solutions has been 795,800 shares per day over the past 30 days. Home Loan Servicing Solutions has a market cap of $1.7 billion and is part of the real estate industry. Shares are up 26% year to date as of the close of trading on Friday. TheStreet Ratings rates Home Loan Servicing Solutions as a sell. The area that we feel has been the company's primary weakness has been its disappointing return on equity. Highlights from the ratings report include:
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Thrifts & Mortgage Finance industry and the overall market, HOME LOAN SERVICING SOLTNS's return on equity is below that of both the industry average and the S&P 500.
- Net operating cash flow has significantly increased by 169.93% to $228.14 million when compared to the same quarter last year. Despite an increase in cash flow of 169.93%, HOME LOAN SERVICING SOLTNS is still growing at a significantly lower rate than the industry average of 739.93%.
- The gross profit margin for HOME LOAN SERVICING SOLTNS is currently very high, coming in at 94.93%. It has increased significantly from the same period last year. Along with this, the net profit margin of 55.20% significantly outperformed against the industry average.
- This stock has increased by 53.91% over the past year, outperforming the rise in the S&P 500 Index during the same period. Despite the fact that the stock's value has already enjoyed nice gains in the past year, we feel that the risks surrounding an investment in this stock outweigh any potential future returns.
- HOME LOAN SERVICING SOLTNS has improved earnings per share by 45.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, HOME LOAN SERVICING SOLTNS turned its bottom line around by earning $1.23 versus -$0.01 in the prior year. This year, the market expects an improvement in earnings ($1.91 versus $1.23).
- You can view the full Home Loan Servicing Solutions Ratings Report.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Chemicals industry. The net income has significantly decreased by 101.1% when compared to the same quarter one year ago, falling from $1,155.90 million to -$13.00 million.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Chemicals industry and the overall market, TRONOX LTD's return on equity significantly trails that of both the industry average and the S&P 500.
- The gross profit margin for TRONOX LTD is rather low; currently it is at 23.05%. It has decreased significantly from the same period last year. Along with this, the net profit margin of -2.47% is significantly below that of the industry average.
- The debt-to-equity ratio of 1.01 is relatively high when compared with the industry average, suggesting a need for better debt level management. Despite the company's weak debt-to-equity ratio, the company has managed to keep a very strong quick ratio of 5.40, which shows the ability to cover short-term cash needs.
- The share price of TRONOX LTD has not done very well: it is down 9.84% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
- You can view the full Tronox Ratings Report.
- ENERPLUS CORP's earnings per share declined by 49.0% in the most recent quarter compared to the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. During the past fiscal year, ENERPLUS CORP swung to a loss, reporting -$0.79 versus $0.62 in the prior year.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 47.5% when compared to the same quarter one year ago, falling from $100.26 million to $52.62 million.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, ENERPLUS CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- ERF, with its decline in revenue, slightly underperformed the industry average of 10.1%. Since the same quarter one year prior, revenues fell by 11.8%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- The gross profit margin for ENERPLUS CORP is currently very high, coming in at 74.13%. Regardless of ERF's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ERF's net profit margin of 14.86% compares favorably to the industry average.
- You can view the full Enerplus Ratings Report.
- Our dividend calendar.