Top Analyst Upgrades Worth Noting on Friday
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
An analyst’s call can be a major catalyst for movement in a stock. In the past I have written in detail about such subjects, as a call can often create a domino effect of revised outlooks and either buying or selling of a stock. In this piece I am looking at four stocks that traded with excessive volatility thanks to the notes issued by analysts; these are all calls worth noting.
Oppenheimer raised its price target on Home Depot from $65 to $76 due to strong housing trends and a change of investor sentiment towards housing plays. While I consider Oppenheimer to be one of the best firms in the country, I disagree with this call. Home Depot is trading at an all-time high in terms of valuation/fundamentals.
Home Depot’s P/E ratio of 23.33 is greater than during the housing boom, prior to the recession, and to this point all optimism is due to speculation. The company has done a great job at improving margins and becoming more efficient, yet revenue is stagnant, and it needs sales growth to trade into that next level. Therefore, I believe there is better value elsewhere in the market.
Shares of PBF Energy increased in value by more than 5% on Friday after Simmons provided an update on the company’s crude procurement strategy, saying that it’s showing early signs of success. The firm upgraded the stock on a valuation basis, saying it has the best valuation in the refining space and the greatest upside. This is a stock that is now trading at new 52 week highs, and is incredibly cheap with a price/sales of 0.18 and a P/E ratio of 10.42. Therefore, I agree, this stock looks like a “buy.”
Pacific Crest and Cowen’s downgrade of First Solar is one that could weigh heavily on the minds of retail investors. Both firms cite concern ahead of earnings. The stock has seen a massive rise since June of last year, 150%, and now with such a sharp rise there are many who are second guessing their position ahead of earnings.
First Solar is a stock that I have liked since July, making it my value of the month back in August, but I agree that the stock could see a pullback. The company will need to show a rise in business capacity, yet new bookings will most likely affect margins. Therefore, the company is in a lose-lose situation, or could be, therefore I wouldn’t own it ahead of earnings.
American International Group (AIG)
AIG gave up some of its initial post-earning gains after Sterne Agee released a note to investors saying that AIG is now fairly valued. The firm then downgraded the stock to Hold, citing uncertainty ahead. This is a call that makes little sense to me. I have no problem with the firm citing growth concerns but to cite valuation makes no sense. This is a company that is trading at just 2.61x earnings and has completely changed its identity since the recession, making it more like Metlife. While I do wish the company could break free from the government and return a yield, I still think it’s a great stock, one that could trade considerably higher.
In my book, Taking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino). For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain. Investors need to avoid this behavior, and not look at the performance and then the news, but rather assess the valuation of a stock and then take into consideration the opinions of the analyst. By doing so, you will be able to find the inconsistencies and a distinction between performance and fundamentals, which creates value and allows for large returns.
BrianNichols is long AIG. The Motley Fool recommends American International Group and Home Depot. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International 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!