Annoying Companies, Great Stocks

Consumers hate them. Investors love them. They’re companies that annoy us with high fees, rotten service and policies so abusive that you want to call the Better Business Bureau -- or a lawyer. And yet some of the very banks, airlines, insurers and other kinds of companies that you hate for their surly service and avaricious policies often turn out to be great investments. "It’s easy to vilify them,”" says Morningstar analyst Jim Sinegal. "But that’s probably why their stocks are so cheap and so attractive to investors."

Airlines

Spirit Airlines (symbol SAVE) , the no-frills carrier based in Miramar, Fla., recently hit the headlines for hiking carry-on baggage fees as high as $100 for those who don't check in online. Spirit also charges for checked bags, drinks, snacks and booking a ticket over the phone through its reservation center. Legroom? Forget about it -- unless you're willing to pay extra, of course.

To say customers don't like this kind of treatment is an understatement. Negative reviews and complaints registered at ConsumerAffairs.com total more than 600. But, says Imperial Capital analyst Bob McAdoo, Spirit is one of the best firms for investors.

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Since going public in May 2011, the stock has soared 45% yet still sells for just 8 times estimated profits, which are expected to jump 30% in 2013. That's a bargain for a firm that analysts see delivering annual profit growth of nearly 20% over the next few years. Besides, McAdoo says, many passengers complain about Spirit because they don't really understand how it works. "If you are expecting traditional airline service, Spirit is annoying," he says. "It would be annoying if you went to McDonald's expecting to sit down in a restaurant with a knife and fork. Spirit offers a different product."

Banks

Complaints about banks are legion -- from allegations that they engaged in predatory-lending practices to charges that they impose a variety of "gotcha" fees on everything from credit cards to overdrafts. But lately, many analysts have taken a shine to the banking industry as the companies improve their balance sheets and benefit from a growing willingness of consumers and businesses to borrow.

Morningstar's Sinegal endorses industry giants Citigroup (symbol C)and Wells Fargo (symbol WFC), both of which trade at modest single-digit price-earnings ratios. He considers San Francisco–based Wells a high-quality bank, with a simple business model and a deposit base "that's the envy of the industry." Sinegal says the stock is worth $42, or 27% more than the current price of $33.

Citigroup is more of a turnaround. The New York City–based bank was drowning in bad debt at the height of the credit crisis, but the number of delinquent loans has been slowly diminishing. Citi recently ousted CEO Vikram Pandit and replaced him with Michael Corbat, a 30-year veteran who was in charge of reforming the loan portfolio. Sinegal thinks Citi may soon reinstate its dividend, which it eliminated in 2009, and values the stock at $46, 31% above its current price of $35.

UBS analyst Greg Ketron favors regional banks, especially U.S. Bancorp (symbol USB). He says the Minneapolis-based company gets nearly half of its revenues from fees for processing credit- and debit-card payments. It also has a substantial trust operation that generates a steady stream of fees. With declining interest rates squeezing bank profit margins, that fee income is particularly attractive, Ketron says. He thinks the stock, now $32, is worth $38.

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Cable operators

High costs, frequent outages, indifferent customer-service reps and long-term contracts that imprison unhappy customers landed some of the biggest names in cable service on 2012's list of 15 most disliked companies in America, based on the American Customer Satisfaction Index. "The quality of service is horrendous," says analyst Andy Hargreaves, of Pacific Crest Securities. "But it's a great business."

What makes cable stocks especially attractive today is that the companies are finding a growing number of uses for their infrastructure -- those wire-filled pipes that connect to your home. Until those wires wear out, the bulk of additional revenue generated by new or increased use of those lines drops quickly to the bottom line.

Barrington Research analyst James Goss is particularly sold on Time Warner Cable (symbol TWC), the cable company that was spun off from media giant Time Warner in 2009. The New York City–based company, which serves 15 million customers in 29 states, is making a strong push to provide high-speed data, voice, video and Internet services to small businesses. Goss thinks that will foster rapid growth over the next few years. Although profits are expected to rise only modestly in 2013 as TWC completes a cycle of large capital expenditures, analysts on average expect 12.5% annual earnings growth over the next few years. Goss believes the stock will sell for $130 within a year, or 37% above today's price of $95.

Car dealers

Americans love driving their cars, but buying them is another story. The BBB receives enough grievances about new-car dealers to consistently rank them in the five most-complained-about industries. But if you're looking for a stock to beat the market, you'll like the deal that Lithia Motors (symbol LAD)offers you. Operating dealerships in suburban markets from Wasilla, Alaska, to Grand Forks, N.D., Lithia is often the only game in town. It may, for instance, operate the only Toyota franchise in 100 miles, says analyst James Albertine, of Stifel Nicolaus. With the bulk of its dealerships located west of the Mississippi, the Medford, Ore., company has suffered more due to the sluggish economy than some of its competitors. But Albertine says that there's a lot of pent-up demand for cars out West, where the recovery has been particularly slow, and that Lithia's fortunes will improve once the economy picks up steam.

Lithia has done a good job of keeping costs in line, which has helped keep profits on an upward trend even in a lackluster economy. Analysts expect earnings to grow at a 16% annual pace over the next several years. Albertine thinks the stock, now $36, will hit $40 within a year.

He also likes Penske Automotive Group (symbol PAG)and Group 1 Automotive (symbol GPI). The first half of 2013 may be tough for these companies because Hurricane Sandy affected about 20% of their dealerships. But by the end of 2013, Albertine thinks that both stocks will have zoomed forward. He has a target price of $35 on Penske and $80 on Group 1 -- 20% and 32%, respectively, above their current prices.

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Calamity insurers

Part of what makes insurers unpopular is the nature of their business: You pay them to reimburse you in the event of a disaster that you hope will never happen. But the other part of their unpopularity has to do with how hard they make it for you to cash in on your claims when you do get into trouble.

In the wake of Hurricane Sandy, for instance, many homeowners complained that insurers had sneaked "hurricane deductibles" into their policies, requiring them to pay more before their coverage kicked in. Moreover, homeowners insurance doesn't cover floods. Thus, the people with devastating losses from ocean surges that washed over whole neighborhoods were covered only to the extent that they had special flood coverage.

Travelers (symbol TRV) was caught in the maelstrom, with roughly 10% of the market share in hurricane-affected states, according to SNL Financial. However, risks such as hurricanes aren't new problems for insurance companies, and insurance-rating firm A.M. Best says all of the big property companies were well prepared for the claims. RBC Capital Markets analyst Mark Dwelle says that even though Travelers is a big name in homeowners coverage, that line accounts for just one-third of its revenues. The rest comes from commercial lines and worker's-compensation coverage, where growth prospects are better. In addition, the New York City–based insurer has been buying back billions of dollars' worth of its stock. Dwelle's one-year price target: $85, or 20% above today's price.

Health insurers

If property insurers are widely reviled, health insurers may do them one better. ConsumerAffairs.com notes that people who have health coverage don't like the terms, think they pay too much, and believe they get nickel-and-dimed at every opportunity. Of the 19 health insurers the site rates, none gets an average grade as high as two stars (out of a maximum of five).

Humana (symbol HUM)has been cited in several ConsumerAffairs.com posts for denying claims and providing miserable customer service. But S&P Capital IQ analyst Phillip Seligman thinks the Louisville, Ky.–based insurer is a great investment. Although he also has "buy" ratings on other health insurers, he says Humana stands out because it specializes in Medicare Advantage plans -- an alternative to traditional Medicare coverage offered by private companies -- at a time when the baby-boom generation is creating a booming business for senior care.

Although health care reform will lead to lower premiums for Advantage programs, Seligman believes the reimbursement rate will be sufficient to keep Humana's profits growing. Seligman thinks the stock, $65 today, will trade at $90 within a year.

Wireless providers

Telecom giants AT&T and Verizon Communications (symbol VZ)provide plenty of services -- from landline phone service to Internet connections -- that most consumers find seamless. But when it comes to their cell-phone operations, consumers complain about everything from spotty reception to miserable customer service -- not to mention exorbitant fees for getting out of a contract early. Yet rich dividends and near-captive markets have kept both stocks on recommended lists for years. Recently, several analysts downgraded AT&T, partly because its share price has become relatively dear. For example, AT&T's price is just $1 shy of UBS analyst John Hodulik's one-year price target of $35. So, although he likes the company, he's neutral on the stock.

But he does recommend Verizon. He notes that Verizon Wireless -- owned by Verizon Communications and Britain's Vodafone -- is making so much money that it recently said it would pay its parents an $8.5 billion dividend. The cash helps fund Verizon Communications' $2.06-per-share annual payout. You won't make a killing in Verizon, but with a lofty 4.7% yield, the stock need rise only a couple of bucks and change to give you a double-digit total return.