Four Analysts Make Four Calls That Are Worth Noting

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

Sometimes an analyst issues a revised outlook or changes his/her rating but does not inform investors of the reasons behind the call. These typically move stocks on the call alone; the price target and outlook. However, some analysts provide detailed reasons behind the call and these are the outlooks that should be noted and used as part of your fundamental research. Therefore, I am taking a look at such outlooks and determining the best way to utilize the information.

Company

Ticker

Firm

Call

U.S. Silica

(NYSE: SLCA)

Jefferies

Hold

Chesapeake Energy

(NYSE: CHK)

J.P. Morgan

Overweight

WhiteWave Foods

(NYSE: WWAV)

Credit Suisse

Outperform

American International Group

(NYSE: AIG)

Wells Fargo

Hold

U.S. Silica

Shares of U.S. Silica fell more than 6% in early trading after it was downgraded from “Buy” to “Hold”. Jefferies cites its reason as being valuation related, due to the fact that shares have rallied 40% since the end of September. Furthermore, the firm remains bullish but insists that it’s not willing to assume that capacity growth can remain aggressive or that the company can maintain 50% gross segment margins long-term.

My problem with the analysis from Jefferies, and the stock’s reaction, is that U.S. Silica is not an excessively overvalued company. It trades with a forward P/E ratio of just 10.68 and a price/sales of 2.5. The company has made strides at improving its balance sheet and despite recent gains the stock has still underperformed the market over the last year. Therefore, I think Jefferies makes good points but that the pullback might be an opportunity.

Chesapeake Energy

Late Wednesday afternoon, J.P. Morgan upgraded shares of Chesapeake Energy by two notches from “Underweight” to “Overweight”. Typically, such a boost would lead shares higher, but the comments of the firm actually pushed shares of the stock lower by more than 3%. The firm’s upgrade is in connection with expected financial improvements and additional asset sales. However, financial risk and an expensive stock are reason for concerns.

For the most part I agree with J.P. Morgan, except for the notion that Chesapeake is expensive. This is a company with operating cash flow over $4 billion and a stock trading significantly below its book value per share. Therefore, I think these “risks” are priced into the stock and that its valuation is less of a concern.

WhiteWave

Credit Suisse’s initiation of coverage barely moved WhiteWave and the firm issued a very short note, but if correct, then the firm’s $19 price target is highly obtainable. According to the firm, WhiteWave continues to outpace the overall growth of the grocery sector in the very important dairy product space. As a result, this accelerated growth should push shares higher over the next year.

Over the last year, shares of The WhiteWave Foods Co. has traded virtually flat. The reason has been slowed growth, which has slowed during the last few years, but has still been positive. My issue moving forward is whether or not the company’s other segments can grow and keep pace with dairy if in fact dairy is the segment to watch.

AIG

Wells Fargo took the attention off AIG’s lawsuit with a bearish case and a “Hold” rating from “Buy”. The firm said that a lack of catalysts in 2013 will lead to an underperforming year. Furthermore, the reasons surrounded the company’s potential decision to avoid buybacks in favor of improving its interest cover ratio. The firm believes that proceeds from the AIA sale will be used to pay off debt, not used for buybacks, which could have a negative effect on the stock.

If Wells Fargo is correct then it’s very likely that shares of the company could trade flat or even lower in 2013. There’s no doubt that investors expect buybacks, therefore the lack of catalysts and the absence of buybacks could be seen as a negative. After a 42% return in the last year, I’d watch this stock close for a correct call from Wells.

A firm that offers reasons for their call is taken more seriously due to providing substance for their reasons. However, like all analyst calls, there are always two sides to a story; and for every bullish call there is someone else who is bearish. Therefore, use this information as part of your research, but it shouldn't dictate your investment decision. 


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group, Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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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