What To Sell: 3 Sell-Rated Dividend Stocks ZFC, KNOP, ACRE

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates.

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 which could 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."

ZAIS Financial

Dividend Yield: 8.90%

ZAIS Financial (NYSE: ZFC) shares currently have a dividend yield of 8.90%.

Zais Financial Corp. invests in, finances, and manages performing and re-performing residential mortgage loans. The company also invests in, finances, and manages residential mortgage-backed securities (RMBS) that are not issued or guaranteed by a federally chartered corporation. The company has a P/E ratio of 3.98.

The average volume for ZAIS Financial has been 66,400 shares per day over the past 30 days. ZAIS Financial has a market cap of $143.1 million and is part of the real estate industry. Shares are up 12.3% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates ZAIS Financial as a sell. Among the areas we feel are negative, one of the most important has been weak operating cash flow.

Highlights from the ratings report include:
  • Net operating cash flow has significantly decreased to -$3.44 million or 201.02% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • In its most recent trading session, ZFC has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, we do not believe this stock offers ample reward opportunity to compensate for the risks, despite the fact that it rose over the past year.
  • ZAIS FINANCIAL CORP reported significant earnings per share improvement 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, ZAIS FINANCIAL CORP increased its bottom line by earning $0.81 versus $0.23 in the prior year. This year, the market expects an improvement in earnings ($1.31 versus $0.81).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 441.8% when compared to the same quarter one year prior, rising from -$6.78 million to $23.17 million.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

KNOT Offshore Partners

Dividend Yield: 9.10%

KNOT Offshore Partners (NYSE: KNOP) shares currently have a dividend yield of 9.10%.

KNOT Offshore Partners LP owns and operates shuttle tankers under long-term charters. The company provides crude oil loading, transportation, and storage services under time charters and bareboat charters. As of April 14, 2014, it had a fleet of five shuttle tankers. The company has a P/E ratio of 20.40.

The average volume for KNOT Offshore Partners has been 79,700 shares per day over the past 30 days. KNOT Offshore Partners has a market cap of $284.7 million and is part of the transportation industry. Shares are down 17.6% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates KNOT Offshore Partners as a sell. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, generally high debt management risk and generally disappointing historical performance in the stock itself.

Highlights from the ratings report include:
  • 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 Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 37.1% when compared to the same quarter one year ago, falling from $3.97 million to $2.50 million.
  • The debt-to-equity ratio of 1.35 is relatively high when compared with the industry average, suggesting a need for better debt level management.
  • The share price of KNOT OFFSHORE PRTNRS LP has not done very well: it is down 15.75% 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. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
  • KNOT OFFSHORE PRTNRS LP's earnings per share declined by 39.1% in the most recent quarter compared to the same quarter a year ago. This year, the market expects an improvement in earnings ($1.37 versus $0.87).
  • The gross profit margin for KNOT OFFSHORE PRTNRS LP is currently very high, coming in at 80.45%. Regardless of KNOP's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, KNOP's net profit margin of 11.29% compares favorably to the industry average.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

Ares Commercial Real Estate

Dividend Yield: 8.40%

Ares Commercial Real Estate (NYSE: ACRE) shares currently have a dividend yield of 8.40%.

Ares Commercial Real Estate Corporation, a specialty finance company, is engaged in principal lending and mortgage banking of commercial real estate (CRE) investments. The company operates in two segments: Principal Lending and Mortgage Banking. The company has a P/E ratio of 15.87.

The average volume for Ares Commercial Real Estate has been 135,000 shares per day over the past 30 days. Ares Commercial Real Estate has a market cap of $340.4 million and is part of the real estate industry. Shares are down 8% year-to-date as of the close of trading on Friday.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

TheStreet Ratings rates Ares Commercial Real Estate as a sell. The company's weaknesses can be seen in multiple areas, such as its weak operating cash flow and generally disappointing historical performance in the stock itself.

Highlights from the ratings report include:
  • Net operating cash flow has significantly decreased to -$50.01 million or 6398.23% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • The share price of ARES COMMERCIAL REAL ESTATE has not done very well: it is down 8.47% 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.
  • 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 Real Estate Investment Trusts (REITs) industry and the overall market, ARES COMMERCIAL REAL ESTATE's return on equity is below that of both the industry average and the S&P 500.
  • ARES COMMERCIAL REAL ESTATE's earnings per share declined by 28.1% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ARES COMMERCIAL REAL ESTATE increased its bottom line by earning $0.73 versus $0.10 in the prior year. This year, the market expects an improvement in earnings ($0.89 versus $0.73).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 103.3% when compared to the same quarter one year prior, rising from $3.27 million to $6.64 million.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

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