Four Analyst Upgrades that I Would Not Chase

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, creating a domino effect of revised outlooks and either buying or selling. Here are four stocks that traded with excessive volatility last Friday thanks to the notes issued by analysts; these are all calls worth noting that might not result in long-term gains.

<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>Western Refining</strong></p> </td> <td> <p><strong><span class="ticker" data-id="208455">(NYSE: <a href="http://caps.fool.com/Ticker/WNR.aspx">WNR</a>)</span></strong></p> </td> <td> <p>Barclays</p> </td> <td> <p>Overweight</p> </td> </tr> <tr> <td> <p><strong>Nanosphere </strong></p> </td> <td> <p><strong><span class="ticker" data-id="216767">(NASDAQ: <a href="http://caps.fool.com/Ticker/NSPH.aspx">NSPH</a>)</span></strong></p> </td> <td> <p>Canaccord</p> </td> <td> <p>Buy</p> </td> </tr> <tr> <td> <p><strong>Intuitive Surgical</strong></p> </td> <td> <p><strong><span class="ticker" data-id="204057">(NASDAQ: <a href="http://caps.fool.com/Ticker/ISRG.aspx">ISRG</a>)</span></strong></p> </td> <td> <p>Several</p> </td> <td> <p>Buy</p> </td> </tr> <tr> <td> <p><strong>Sequenom </strong></p> </td> <td> <p><strong><span class="ticker" data-id="207482">(NASDAQ: <a href="http://caps.fool.com/Ticker/SQNM.aspx">SQNM</a>)</span></strong></p> </td> <td> <p>Piper Jaffray</p> </td> <td> <p>Overweight</p> </td> </tr> </tbody> </table>

Western Refining

Much like other refiners, shares of Western Refining have continued to tick higher and created a new 52-week high last Friday thanks to Barclays. The stock ticked higher by 5.1% after Barclays’ $47 price target and its Overweight rating. The reason for the firm’s bullish initiation of coverage is due to the continued distinction between oil and gasoline.

Within in the industry, stocks are benefiting from a continued trend of oil prices dropping, therefore lowering the costs for refiners, and gasoline prices rising, therefore increasing the revenue for refiners. Obviously, if costs decrease and revenue increases then a company’s margins will improve.

As a result, Barclays believes Western is a Buy. The big question is regarding sustainability. Despite these factors the company did just post a mixed earnings report. In my opinion, sooner or later the price between oil and gasoline will stabilize, which could create selling pressure among refiners. Therefore, I wouldn’t buy at these levels.

Nanosphere

Canaccord issued a 150% upside price target for Nanosphere, a company that lost 30% of its value in February after issuing weak guidance. Therefore, with the stock being oversold, the bullish call created gains of 13.85% on Friday. The firm believes that Nanosphere is poised to capture a large piece of the molecular diagnostics business after it shifted its focus to blood stream infections.

Last June the company earned an FDA approval for Gran-Positive Blood Culture Nucleic Acid, and has since become an early leader in the detection of sepsis. My problem is that the company re-shifted its focus to blood stream infections last year and just issued guidance that was way below expectations.

I agree that it is a large-potential market, however in this case, I will look for guidance from the company rather than from the analyst, and guidance from the company drove the stock 30% lower last month.

Intuitive Surgical

Last week was volatile for shares of Intuitive Surgical after news that the company is being probed by U.S. regulators regarding the safety of its robots. Reportedly, regulators have contacted a number of high-profile hospitals to discuss any potential problems.

But analysts from Cantor Fitzgerald, Janney, and Blair all came to the company’s defense. Cantor said the reaction was “overdone” and then upgraded shares to Buy. Other analysts with Buy ratings report that the probe is not about safety but rather surveillance and believe that shares should be bought.

In my opinion, the stock is not cheap, and although this “probe” could be precautionary, I would still wait due to the stock being near the top of its range.

Sequenom

Piper Jaffray joined seven other analysts with bullish ratings on shares of Sequenom. The firm raised its price target to $6.50, which then pushed shares 6.08% higher on Friday. Jaffray, like other analysts that cover the stock, believe there is great long-term value in the DNA detection and sequencing equipment company.

The company is among the smallest of those in the space, yet is growing rapidly at more than 60% year-over-year. Jaffray believes that this growth will continue and that margins will improve.

My concern is margins, as the company has a profit margin of (148.9%) despite strong growth. I am not sure when profitability will be achieved and wonder if this will become the next Dendreon, a fast-growing unprofitable company. Therefore, I would not chase this upgrade until signs of profit are evident.

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 recommends Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical and Western Refining. 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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