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Analyst Calls That Might Be the Worst All Year

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite the fact that two different analysts often have completely different opinions regarding a stock, indicating one to be wrong, investors weigh their opinion heavily due to their education, knowledge, and the research material that is at their disposal. But every now and then an analyst makes a call that is so incredibly off-base that it provides the retail investor a great opportunity. In this article, I am looking at two such calls: One that provided investors with a great opportunity and one that most likely will.

Facebook (NASDAQ: FB) is Worth $15!

Back in September, Barron’s cover story for its magazine was entitled “Facebook is Worth $15.” The piece itself came as the stock was crashing lower, and provided a very one-sided opinion as to why Facebook was a “sell.” Investors took the perspective to heart and in response shares of Facebook ticked lower.

In the Barron’s piece the analyst made several bearish arguments that had all contributed to the stock’s decline. Barron’s noted that the stock was trading with a forward P/E ratio of 36 times next year’s earnings, and was far superior to other tech companies Google and Apple. The piece also discussed the company’s struggles to monetize mobile, the fact that Facebook was becoming less cool, and finally that its $1 billion purchase of Instagram was ominous.

The very next day, following the Barron’s piece, I immediately wrote an article explaining why Barron’s was wrong, and why it was an emotional call based solely on the direction of the stock. I had always been undecided regarding Facebook, but it was at this time that I decided to initiate my long position in the stock.

The reason I decided to initiate a long position can be explained through a famous Warren Buffett quote,

Be fearful when others are greedy and greedy when others are fearful.”

The Barron’s piece did not consider any of the positives, and did not take into consideration the decline of the company, or its potential revenue if it ever monetized mobile or its one billion users.

Barron’s made an unfair comparison to Apple and Google. Facebook is a social media internet based company, that should be compared more so to Linkedin, Yelp, or even Zillow. When compared to these companies, Facebook is actually cheap, even after its gains. The company has since figured out how to monetize mobile, has record users, and in regards to Instagram, there were a lot of people who didn’t agree with Google’s purchase of Youtube. Therefore, you never know, but one thing we do know is that Barron’s was way off and is now eating their words.

Goldman Sach’s Makes a Barron’s Like Call

I have always respected the guidance of Goldman Sachs (NYSE: GS), considering them to be one of the better investment firms in the market. However, its downgrade on Wednesday of Seagate Technology (NASDAQ: STX) does not seem to take into consideration any of the company’s alternative growth drivers besides PCs, nor does it consider its valuation. Goldman noted that a revision to shrinkage from growth is expected to hurt hard disk drive (HDD) unit demand in 2013. Therefore, Goldman rated Seagate a “sell,” which not only affected Seagate but also Western Digital (NASDAQ: WDC).

First, I understand that hard disk drive companies such as Western Digital and Seagate do not directly benefit from the growing industry of smartphone and tablet storage. I also understand that PCs remain a challenge. But this downgrade does not seem to take into consideration the value of these two companies. I have explained on several occasions that both companies operate in an industry with such low expectations that any surprises could result in significant gains, and it would take a near total collapse in HDDs for either company to fall with the level of loss to warrant a “sell” rating.

Much like Facebook, it seems that most analysts are sticking together and downgrading both Seagate and Western Digital as their stocks fall. It is amazing to see how these firms tell you to “buy” at 52-week highs, but “sell” when priced for value. Like I said, I respect Goldman Sachs, but this call has not taken into consideration that both stocks trade with P/E levels of under 5, have price/sales ratios of under 1, pay incredible dividends and are constantly buying back shares, and most importantly benefit from the growth of smartphones and tablets due to the HDD storage that is required to store data on the cloud.

Conclusion

Barron’s call on Facebook will no doubt go down as one of the worst calls of the year and I have a sneaking suspicion that Goldman Sachs’ call will fall in the same category. Seagate is a company that just recently increased its dividend by 19%, and therefore is now paying a forward yield of 6%. In addition, it operates in a high margin business, where it has vowed to return 50% of its free cash flow to shareholders in the form of dividends and buybacks. Personally, I have never heard of a company offer such incentives if its business was as bad as some analysts expect. Therefore, Goldman’s call makes little sense to me, much like Facebook’s. And with the stock trading more than 20% off its 52-week high and being so investor friendly, I can’t see investors letting this high yield investment slip through their hands. 


BrianNichols is long STX, FB. The Motley Fool owns shares of Facebook and Western Digital and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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