Two Upgrades & One Downgrade 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; 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

Facebook

(NASDAQ: FB)

Raymond James

Buy

Sony

(NYSE: SNE)

Citi

Buy

AK Steel Holding

(NYSE: AKS)

Goldman Sachs

Sell

 

Facebook continues to rise with a change of perception

Shares of Facebook received yet another upgrade on Monday, by Raymond James. The analyst, Aaron Kessler, cited expectations for increasing monetization due to mobile, new ad formats, and international. These are the catalysts that have led many to upgrade shares of Facebook over the last few months, ever since CEO Mark Zuckerburg’s interview with Tech Crunch where he disclosed strength in mobile and with ads. As a result, shares rallied another 2%.

My only problem with this upgrade is that it comes at $31.50 when the stock is trading with a price/sales of 14.70. This follows a common pattern of analysts upgrading stocks when they trend higher and downgrading when they trade lower. Shouldn’t analysts do the opposite to capitalize on value? I have covered and have written on this subject in extreme detail, and for that fact I think Facebook may be a little too expensive and that Kessler is late to the party.

Citi sees higher profits for Sony

It’s not too often that shares of fallen electronic giant Sony get an upgrade, however Citi joins the ban of analysts who think that Sony might now be presenting upside. The firm specifically notes the company’s electronics division and a belief that recent “moves” could result in improved profitability. The stock moved 5% on this news combined with news that the Chinese government might lift its ban on videogame consoles. Sony continues to be the cheapest of the large tech stocks and therefore it could trade higher due to being oversold. The problem is that in technology a company needs innovation, and I don’t see the next “iPhone” on the horizon from this tech company.

It simply looks ugly for AK Steel

After a fairly large rally in the month of December, shares of AK Steel have lost 9% of their value in 2013, including more than 5% on Monday. The stock was given a harsh downgrade by Goldman Sachs and a $3 price target. The firm specifically noted the stock’s recent rally, saying that it was unwarranted given the view for weak, flat steel prices. As I said, the firm was somewhat harsh with its downgrade, mentioning a number of issues such as the company’s highly leveraged balance sheet, high pension funding requirements, and a high capex to fund its raw material strategy. Goldman says that it sees no end in sight for the company, and quite frankly, I agree. The stock trades with a price/sales of just 0.08, but continues to lose money and is operating in a very weak industry. Therefore, I wouldn’t buy the stock, yet because of it being so oversold I am not sure that it will fall to $3.

Conclusion

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 Facebook. 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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