Four Analyst 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.
A downgrade often means nothing--sometimes it’s just analysts “following the leader” and playing to the trend of a stock, or overreacting. But one way that investors can use an analyst’s call is to read the notes, take the reasons behind the call into consideration, and then use it as part of your research. With that being said, I am looking at four noteworthy downgrades on Friday, and the notes that were issued to investors.
- Teva Pharmaceuticals rose almost 2% on Friday despite being downgraded by Canaccord. The firm had been bullish on Teva but lowered its price target from $50 to $45, which is still a nice premium on its current price of $38.68. The downgrade actually read like an upgrade as the firm noted sales of its drug Copaxon rising 14% to $1.1 billion during its most recent quarter. The problem is that total sales appear to be slowing, as the company missed Q4 expectations. This is somewhat unexpected because most believe that this is the time that Teva should be exploding with sales growth due to the patent cliff, yet growth remains somewhat conservative. Therefore, I’d look elsewhere in the biotech space.
- 3SBio traded higher by almost 7% after the company announced its plan to become private. However, Aegis wasn’t happy, saying the deal substantially undervalues the company. The deal values the company at $350 million, which would be roughly 3.5 times its last 12 months of sales. The company has growth of more than 30%, operating margins over 20%, and $132 million in cash with no debt. Therefore, Aegis’ opinion is not representing a greedy shareholder but rather a fundamental fact based on takeover prices of other biotech firms. I too think the company is selling itself short and would anticipate significant investor backlash, possibly preventing the deal from occurring.
- Technology company Riverbed lost almost 20% of its value on Friday after weak earnings related news. The company beat Q4 expectations but issued soft guidance. Therefore, the stock received three total downgrades, as analysts all mentioned the company's struggles to integrate its newly acquired OPNET. This acquisition was viewed as risky, and a bit of a head scratcher when it occurred. At this time the company is showing no signs of sustained growth, therefore until we see signs of improvement I'd have to agree that perhaps the OPNET might bring even more losses down the road.
- Nuance also swung to a near 20% loss with technology peer Riverbed after a slew of downgrades. The stock was pushed lower after it missed EPS expectations and then guided for several quarters of weakness in healthcare and EMEA sales. Goldman immediately spoke, saying that the company's $1 billion in healthcare sales is at risk. Needham also downgraded the stock, expecting a 200-250 basis point decline in gross margins. This is a company that continues to disappoint, and therefore it's hard to argue the points made by analysts.
It is good to use this information as part of your research, but you must ensure that you are assessing the stock and its valuation with your own due diligence. It is important not to make an emotional decision based on the performance of a stock, or the opinions of analysts who often base their opinions on a stock’s volatility. An important rule to remember is to assess whatever it is that created movement in the stock, determine the fundamental outcome of the news, and if you make a logical decision based on fundamental implications then you might find yourself a good opportunity.
BrianNichols has no position in any stocks mentioned. The Motley Fool recommends 3SBio, Nuance Communications, and Riverbed Technology. The Motley Fool owns shares of Nuance Communications and Riverbed Technology. 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!