Three Market-Moving Upgrades: 2 to Buy & 1 to Sell

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It Might Finally Be Time to Buy this Fallen Stock

Shares of semiconductor company Mellanox Technologies (NASDAQ: MLNX) saw a boost in valuation after JMP Securities upgraded the stock to “Outperform’ with a $70 price target. The firm believes that its recent downtrend was too harsh and that the stock is now priced attractively. JMP also likes the company’s recent partnership with Radware and the fact that its InfiniBand adapter cards and switches are being used in a high-end SQL Server data warehousing system developed by Microsoft and offered by Hewlett-Packard and Dell.

Over the last five years MLNX has seen gains of more than 300%, but has declined more than 50% during the last six months. The company’s decline began due to an increase in competition and lower guidance. However, while the company may not be growing at 100% year-over-year, it is still growing rapidly, and is now trading at just 22 times earnings. Therefore, I agree with the upgrade, price target, and the upside that its new partnerships could create.

Might be Time to Buy this Underperforming Speculative Stock

Triangle Petroleum (NYSEMKT: TPLM) is a speculative energy company in the developmental phase of production and growth. The stock has traded volatile, but mostly flat, during the last five years, but on Thursday, Imperial Capital initiated coverage with an “Outperform” rating and a $7.50 price target. The stock then saw gains of more than 6% after the firm stated its belief that good investments in RockPile and Caliber Midstream will provide vertical integration and strong returns. The firm added that the company is well-positioned to develop its Bakken acreage with a third rig to expedite the drilling program.

Much like a Phase 3 biotechnology stock, you can’t value this company on current fundamentals. Currently, it has revenue of just $42.22 million over the last 12 months, but is guiding for revenue of almost $300 million in 2014. Therefore, this is a fast-growing energy company with a lot of upside that is trading at just one times next year’s sales, and a forward P/E ratio of 10.78. As a result, the stock is cheap and I agree with the analyst that this is a good long-term “buy.”

Big-Time Upgrade Comes Three Months too Late

Shares of MEMC Electronic Materials (NYSE: SUNE) traded higher by over 3% on Thursday after Goldman Sachs upgraded shares to “Buy” with a $6.50 price target. The firm is encouraged by the company’s “sum-of-parts,” which Goldman estimates to be worth much more than the company’s valuation. Specifically, Goldman mentioned its semiconductor segment and said that it’s worth $5 alone, and then believes its option on solar is where the real upside is presented.

My problem with WFR is that it has risen 72% in the last three months, and looks as though all previous value has been priced into its stock. This is a company that continues to lose business year-over-year but has seen a shift in sentiment along with other solar-based companies.

Next week the company will present guidance and I view it as a bad sign that the company has been unable to predict trends. Therefore, I think Goldman’s upside was based on stock performance, and that the firm did what so many other firms do in “piggybacking” off other upgrades and optimism rather than truly looking at the outlook for this company.

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 own 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. 


Brian Nichols 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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