3 of Wall Street’s favorite stocks walking a fine line

The stocks in this article have caught Wall Street’s attention in a big way, with price targets implying returns above 20%. But investors should take these forecasts with a grain of salt because analysts typically say nice things about companies so their firms can win business in other product lines like M&A advisory.

At StockStory, we look beyond the headlines with our independent analysis to determine whether these bullish calls are justified. That said, here are three stocks where Wall Street’s estimates seem disconnected from reality and some better opportunities to consider.

Kadant (KAI)

Consensus price target: $357.50 (34.4% implied return)

Headquartered in Massachusetts, Kadant (NYSE:KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.

Why Does KAI Worry Us?

1. Annual revenue growth of 7% over the last two years was below our standards for the industrials sector

2. Performance over the past two years shows its incremental sales were less profitable, as its 4% annual earnings per share growth trailed its revenue gains

3. Diminishing returns on capital suggest its earlier profit pools are drying up

Kadant’s stock price of $266.04 implies a valuation ratio of 21.2x forward P/E. Dive into our free research report to see why there are better opportunities than KAI.

Mayville Engineering (MEC)

Consensus price target: $37 (146% implied return)

Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE:MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.

Why Do We Pass on MEC?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 3.7% annually over the last two years

2. Gross margin of 12.2% reflects its high production costs

3. Revenue growth over the past five years was nullified by the company’s new share issuances as its earnings per share fell by 17% annually

Mayville Engineering is trading at $15.03 per share, or 20.9x forward P/E. Read our free research report to see why you should think twice about including MEC in your portfolio, it’s free.

NN (NNBR)

Consensus price target: $6.67 (75.5% implied return)

Formerly known as Nuturn, NN (NASDAQ:NNBR) provides metal components, bearings, and plastic and rubber components to the automotive, aerospace, medical, and industrial sectors.

Why Are We Bearish on NNBR?

1. Sales stagnated over the last five years and signal the need for new growth strategies

2. Issuance of new shares over the last five years caused its earnings per share to fall by 9.5% annually

3. Low free cash flow margin of -0.6% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders