Four High-Profile Downgrades 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.

An upsurge in analyst calls took place on Friday, including high-profile downgrades that pushed several stocks lower. Such activity was more than what we usually see during a typical session. Therefore, I am looking at some of the top stock moving calls that took place and examining what was said to move these stocks.

Company

Ticker

Firm

Call

Corning

(NYSE: GLW)

Goldman Sach

Neutral

J.C. Penney

(NYSE: JCP)

UBS

Sell

General Mills

(NYSE: GIS)

Goldman Sachs

Sell

Herbalife

(NYSE: HLF)

Janney

Hold

Corning

Shares of technology company Corning slipped lower by 1.50% after being downgraded by Goldman, just three months after being upgraded by the firm. Goldman argues that the company’s Q3 earnings beat and Q4 pre-announcement has already priced in all of the catalysts that led to its previous upgrade, such as LCD industry improvements and capital allocation moves. Now, the firm believes that LCD could lead the stock lower in Q1, due to inventory correction issues.

The call by Goldman is a bit unclear, as the stock was added to the firm’s 23 best stocks for fat dividends and big buybacks of 2013. Personally, I agree that we’ll see weakness in LCD sales following the holiday season, yet with a P/E ratio under 10, Corning is not an expensive stock. As a result, with a weakened industry and a stock priced for weakness, I think “Neutral” is the appropriate call.

J.C. Penney

UBS joins a number of other analysts who have called out J.C. Penney’s deteriorating earnings outlook and emerging signs of cash flow distress as a warning sign for the stock. JCP slipped lower by nearly 5% on Friday as analysts/investors are starting to believe that the company will have to take some drastic actions to improve its cash flow situation. As a result, it’s hard to imagine a scenario where the stock doesn’t get hit with major selling pressure.

All I can say is that I totally agree. This is a company that has lost $520 million over the last 12 months and continues to worsen with lost revenue.

General Mills

The entire food sector traded lower on Friday following a series of harsh downgrades from varied analysts; the worse was Goldman Sachs’ downgrade to “Sell” on General Mills. The downgrades were a result of valuations that have slowly risen over the last couple years, but Goldman specifically states that General Mills’ over-extended retail portfolio is poised to experience “product cycle issues.”

The firm’s most significant issue is in regards to expectations for the company’s new lineup of cereals after a soft year for the industry. General Mills had been trading at all-time highs before the downgrade, and although it’s a high-yield stock, I agree with the concerns set forth by Goldman.

Herbalife

An upgrade, downgrade, and everything in between is nothing new for Herbalife or its investors. In fact, investors have become somewhat immune to harsh and bullish remarks. However, Janney might have provided the best assessment of the company, saying: It’s both a terrible short and a terrible long. Janney identified both the upside and downside but did acknowledge that there is a possibility that regulators eventually “kill” the company.

In light of all the strong opinions surrounding the company, it was nice to hear an unbiased view, someone who simply rates the stocks as a “Hold.” After all, the next year promises to be quite eventful.

A firm that offers reasons for their call is taken more seriously because they provide substance for their reasons. However, like all analyst calls, there are always two sides to a story -- 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 Corning. The Motley Fool owns shares of Corning. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure