5 Dividend Paying Stocks You Should Avoid According to Morgan Stanley’s Quant Screen

1. Lithia Motors, Inc. (NYSE:LAD)

Dividend Yield as of September 27: 0.73%

Total Expected Return: -20%

Number of Hedge Fund Holders: 40

Lithia Motors, Inc. (NYSE:LAD) is a leading American retailer of automobiles and auto parts. The company operates through three segments: Domestic, Import, and Luxury. As of September 27, Lithia Motors, Inc. (NYSE:LAD) has lost 24.15% of its value year to date, and Morgan Stanley see an additional 20% downside to the stock moving ahead.

On July 14, Morgan Stanley analyst Adam Jonas slashed his price target on Lithia Motors, Inc. (NYSE:LAD) to $220 from $260 and maintained a sell-side Underweight rating on the shares. On September 9, BofA analyst John Murphy lowered his price target on Lithia Motors, Inc. (NYSE:LAD) to $470 from $565 and reiterated a Buy rating on the shares. As of September 27, the stock is offering a forward dividend yield of 0.73% and has negative free cash flows of $20.9 million.

Insider Monkey identified 40 hedge funds that held stakes in Lithia Motors, Inc. (NYSE:LAD) at the end of the second quarter of 2022. The total value of these stakes amounted to $2.01 billion, down from $2.55 billion a quarter ago with 46 positions. The hedge fund sentiment for the stock is negative.

As of June 30, Abrams Capital Management owns more than 2.3 million shares of Lithia Motors, Inc. (NYSE:LAD) and is the largest shareholder in the company. The investment covers 17.36% of David Abrams’ 13F portfolio.

Here is what Oakmark Funds had to say about Lithia Motors, Inc. (NYSE:LAD) in its first-quarter 2022 investor letter:

“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors (NYSE:LAD) is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”

You can also take a look at 10 Dividend Stocks With Over 7% Yield and 10 Best Dividend Stocks to Buy in 2022.

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