What To Sell: 3 Sell-Rated Dividend Stocks EARN, CEQP, MEP

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

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."

Ellington Residential Mortgage REIT

Dividend Yield: 13.40%

Ellington Residential Mortgage REIT (NYSE: EARN) shares currently have a dividend yield of 13.40%.

Ellington Residential Mortgage REIT is a real estate investment trust. The company has a P/E ratio of 9.25.

The average volume for Ellington Residential Mortgage REIT has been 42,000 shares per day over the past 30 days. Ellington Residential Mortgage REIT has a market cap of $149.9 million and is part of the real estate industry. Shares are up 0.9% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates Ellington Residential Mortgage REIT as a sell. Among the areas we feel are negative, one of the most important has been unimpressive growth in net income over time.

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 Real Estate Investment Trusts (REITs) industry. The net income has significantly decreased by 840.8% when compared to the same quarter one year ago, falling from -$0.13 million to -$1.18 million.
  • In its most recent trading session, EARN 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.
  • The gross profit margin for ELLINGTON RESIDENTIAL MTG is currently very high, coming in at 85.20%. Regardless of EARN's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, EARN's net profit margin of -9.96% significantly underperformed when compared to the industry average.
  • EARN, with its decline in revenue, underperformed when compared the industry average of 9.8%. Since the same quarter one year prior, revenues slightly dropped by 2.0%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • When compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market, ELLINGTON RESIDENTIAL MTG's return on equity is below that of both the industry average and the S&P 500.

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Crestwood Equity Partners

Dividend Yield: 8.40%

Crestwood Equity Partners (NYSE: CEQP) shares currently have a dividend yield of 8.40%.

Crestwood Equity Partners LP provides midstream solutions to customers in the crude oil, natural gas liquids (NGLs), and natural gas sectors of the energy industry in the United States. The company has a P/E ratio of 21.80.

The average volume for Crestwood Equity Partners has been 349,900 shares per day over the past 30 days. Crestwood Equity Partners has a market cap of $1.2 billion and is part of the energy industry. Shares are down 20.5% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates Crestwood Equity Partners as a sell. The company's weaknesses can be seen in multiple areas, such as its generally disappointing historical performance in the stock itself, generally high debt management risk and poor profit margins.

Highlights from the ratings report include:
  • CEQP's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 53.65%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, CEQP is still more expensive than most of the other companies in its industry.
  • The debt-to-equity ratio is very high at 3.09 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with the unfavorable debt-to-equity ratio, CEQP maintains a poor quick ratio of 0.91, which illustrates the inability to avoid short-term cash problems.
  • The gross profit margin for CRESTWOOD EQUITY PARTNERS LP is rather low; currently it is at 20.94%. Regardless of CEQP's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 3.85% trails the industry average.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. In comparison to the other companies in the Oil, Gas & Consumable Fuels industry and the overall market, CRESTWOOD EQUITY PARTNERS LP's return on equity is significantly below that of the industry average and is below that of the S&P 500.
  • CRESTWOOD EQUITY PARTNERS LP 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. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, CRESTWOOD EQUITY PARTNERS LP increased its bottom line by earning $0.32 versus $0.15 in the prior year. For the next year, the market is expecting a contraction of 1.6% in earnings ($0.32 versus $0.32).

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Midcoast Energy Partners

Dividend Yield: 10.00%

Midcoast Energy Partners (NYSE: MEP) shares currently have a dividend yield of 10.00%.

Midcoast Energy Partners, L.P. engages in gathering, processing, treating, transporting, and marketing natural gas and natural gas liquids (NGL) in the United States. It operates through two segments, Gathering, Processing, and Transportation; and Logistics and Marketing. The company has a P/E ratio of 10.17.

The average volume for Midcoast Energy Partners has been 99,000 shares per day over the past 30 days. Midcoast Energy Partners has a market cap of $310.4 million and is part of the energy industry. Shares are down 0.7% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates Midcoast Energy Partners as a sell. Among the areas we feel are negative, one of the most important has been poor profit margins.

Highlights from the ratings report include:
  • The gross profit margin for MIDCOAST ENERGY PARTNERS LP is currently extremely low, coming in at 12.71%. Regardless of MEP's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, MEP's net profit margin of 4.27% compares favorably to the industry average.
  • MIDCOAST ENERGY PARTNERS LP 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. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, MIDCOAST ENERGY PARTNERS LP increased its bottom line by earning $1.40 versus $0.21 in the prior year. For the next year, the market is expecting a contraction of 70.7% in earnings ($0.41 versus $1.40).
  • Despite the weak revenue results, MEP has outperformed against the industry average of 20.3%. Since the same quarter one year prior, revenues slightly dropped by 6.0%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • The current debt-to-equity ratio, 0.41, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that MEP's debt-to-equity ratio is low, the quick ratio, which is currently 0.52, displays a potential problem in covering short-term cash needs.
  • Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, MIDCOAST ENERGY PARTNERS LP's return on equity significantly trails that of both the industry average and the S&P 500.

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