Three Stock-Moving Calls that Make Little Sense

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 makes a call that stretches beyond reason, and I often wonder what reason goes into making such a call. On many occasions, these calls are simply “following the leader” behind other analysts, in an attempt to create mediocrity within the industry to satisfy the funds that employ such firms. In this piece, I am looking at three calls that fit into this category, all of which are hard to comprehend.  

Workday (NYSE: WDAY)

Shares of the cloud-based provider of HR software Workday rose 7.12% to $61.72 on Monday to new highs after Pacific Crest analyst Brendan Barnicle reiterated his “Outperform” rating and his long-term price target of $90. Barnicle joins 18 other analysts who cover the stock, seven “buys” and 11 “holds”, yet his $90 target far exceeds the $57.08 consensus.

Barnicle argues that the company could be worth as much as $15 billion based on its $50 billion addressable market, a market that Barnicle believes could grow to $70 billion by 2015. Furthermore, the analyst believes the stock should find long-term support due to its two founders owning 60% of the stock.

WDAY is the most overvalued stock in the market, with a profit margin of (47.53%) and a price/sales of 40.65! This insane valuation is based on growth of 100% year-over-year; meanwhile companies such as Questcor Pharmaceuticals and Jazz Pharmaceuticals have greater growth and trade with price/sales ratios below 6.0 and are profitable with large “addressable markets.”

At this rate, Workday would have to grow by 100% and trade flat for three years just to share an equal value as the two biotech stocks mentioned, and who knows when the company will achieve profitability. Therefore, with perfection baked into the stock, it would be unwise and illogical for any investor to buy at these levels based on an “addressable market” when there is such better value scattered throughout the market.

Barnes & Noble (NYSE: BKS)

Shares of the troubled (book) retail store Barnes & Noble traded higher by 5.31% on Monday following a very speculative view from the website Barron’s. In the article, Barron’s makes a case that BKS is worth $19 a share and that much of this upside is based on the fact that Microsoft “would be smart” to acquire the book retailer to jumpstart its retail business and to set up a store within-a-store to increase tablet sales. While this view is interesting and entertaining, it lacks substance, and is solely speculative at this point in time.

It’s hard to argue the fact that BKS is a cheap stock. It trades with a price/sales of just 0.13 and has lost significant value over the last five years as Amazon grows more dominant in the book selling arena. However, this is a stock that is trading with a 60% premium to its 52-week low and continues to see sales decline in the high single digits while operating with a profit margin of (1.52%).

The argument that Microsoft might purchase the company to boost tablet sales might make sense to some. However, consider the fact that Microsoft has its own stores in the best shopping centers throughout the country (many of which are located near a Barnes & Noble). Barnes & Noble displays its own tablets in its own stores, and has been unable to create any real traction in the space. Therefore, why would Microsoft all of a sudden be so successful by acquiring the company? Overall, it makes little sense, and with a declining business combined with a stock that has priced in all potential optimism, I would not chase this rumor.

NuStar Energy (NYSE: NS)

Shares of NuStar Energy fell lower by almost 7% on Monday after Credit Suisse downgraded the stock to “Neutral”. The firm cited a potential cut in distribution as the main culprit due to the TexStar termination of the NGL acquisition. The firm believes that this impact from a failed acquisition could once again put shares under pressure.

While energy is not my specialty, the call of the analyst is made from the perspective that this is an overvalued stock. But in fact, this is a stock that has lost 23.5% of its value over the last year and trades with a price/sales of just 0.66 with very low expectations. In fact, during the company’s last quarter it posted revenue of $984.7 million, which beat expectations by more than $180 million. The company also said that it expects improvements from all three of its segments throughout the year. Therefore, the company appears to be performing better than expectations and is expecting to see fundamental improvements in 2013. As a result, I would not make a decision to sell based solely on this analyst’s opinion.

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), with one scenario being after an analyst’s call. 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 after a call, and look not at the performance of the stock but rather the performance of fundamentals. 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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