Four Analyst Upgrades on Tuesday 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 analyst’s call can be a major swing in momentum for 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.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Ticker</p> </td> <td> <p>Firm</p> </td> <td> <p>Call</p> </td> </tr> <tr> <td> <p><strong>BE Aerospace</strong></p> </td> <td> <p><strong><span class="ticker" data-id="202934">(NASDAQ: <a href="http://caps.fool.com/Ticker/BEAV.aspx">BEAV</a>)</span></strong></p> </td> <td> <p>Goldman Sachs</p> </td> <td> <p>Conviction Buy</p> </td> </tr> <tr> <td> <p><strong>SanDisk <br /></strong></p> </td> <td> <p><strong><span class="ticker" data-id="205473">(NASDAQ: <a href="http://caps.fool.com/Ticker/SNDK.aspx">SNDK</a>)</span></strong></p> </td> <td> <p>RBC</p> </td> <td> <p>Buy</p> </td> </tr> <tr> <td> <p><strong>International Paper</strong></p> </td> <td> <p><strong><span class="ticker" data-id="204041">(NYSE: <a href="http://caps.fool.com/Ticker/IP.aspx">IP</a>)</span></strong></p> </td> <td> <p>Jefferies</p> </td> <td> <p>Buy</p> </td> </tr> <tr> <td> <p><strong>Applied Materials</strong></p> </td> <td> <p><strong><span class="ticker" data-id="202796">(NASDAQ: <a href="http://caps.fool.com/Ticker/AMAT.aspx">AMAT</a>)</span></strong></p> </td> <td> <p>Goldman Sachs</p> </td> <td> <p>Conviction Buy</p> </td> </tr> </tbody> </table>

BE Aerospace

Goldman Sachs called BE Aerospace the “best story in aerospace” on Tuesday as it reiterated its “Conviction Buy” rating and upped its price target from $67 to $68. Obviously, a $1 price target increase does not seem like much, but considering its current price of $52.24 you can see that Goldman is expecting nice gains from the stock.

The firm specifically notes higher margins from its Business Jet unit and the likelihood of an upside surprise in earnings as drivers. The firm also provided long-term EPS expectations, with 2013 being $3.46, 2014 at $4.46, and 2015 at $5.37. Therefore, the firm expects long-term growth and margin improvements. The company has done a great job at growing its business (and margins). Last quarter it grew revenue by 22.7% and earnings by 31.2%. Also, the stock is cheap, with a forward P/E ratio of just 12.59. Therefore, Goldman’s expectations are highly likely.

SanDisk

On Tuesday, shares of SanDisk traded higher by 2.5% after RBC upgraded the stock to “Buy” with a $65 price target. The firm’s upgrade is due to the company’s successful transition. In the past, SanDisk was known strictly as a retail flash memory card supplier. Now, it has branched out into a vertically integrated flash memory solutions provider for OEMs.

RBC believes that this successful transition has and will continue to bring about new opportunities, and so far the firm is correct. SanDisk is trading very close to its 52-week highs and with profit margins of 8.26%, there is a lot of room for growth. Therefore, I agree and would watch the stock.

International Paper

Jefferies launched coverage with a “Buy” rating on International Paper and a $52 price target. The firm’s upgrade was more industry-related versus company-related, as we’ve seen a recurring theme of containerboard upgrades over the last few months.

In my opinion, International Paper is the best in the space. It has double digit revenue growth and with profit margins of less than 3% there is room for improvement. The stock is trading at just 9.4 times next year’s earnings with a price/sales of 0.65. Therefore, it is cheap, and could easily reach the price target of $52.

Applied Materials

Goldman Sachs upgraded Applied Materials to “Conviction Buy,” the firm’s highest honor, on an executive move. It is very rare that such a call would occur from a firm such as Goldman without fundamental cause. However, Goldman notes that Bob Halliday’s promotion to CFO is a game changer.

Halliday was the former CEO of Varian, and was crucial in (more than) doubling Varian’s share of the implantation equipment market in its seven years prior to Applied Material purchasing the company. Goldman obviously thinks highly of Halliday, and believes that he will help the company execute on a more streamlined cost structure and to gain chip equipment share.

I think this is an interesting upgrade for Goldman Sachs, as these unmeasured fundamentals are rarely assessed. However, management matters, and if he’s as good as advertised, then this is a stock that could rally with room for fundamental growth.

Conclusion

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 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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