Do These Tuesday Upgrades Present a Buying Opportunity?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After several stock-moving upgrades on Tuesday, let's see whether the most significant ones present a buying opportunity.
Semiconductor Company Praised, Despite Weak Guidance
Shares of semiconductor developer Cray (NASDAQ: CRAY) rallied 5.81% on Tuesday after Sterne Agee initiated coverage with a “Buy” rating and a $25 price target. That represents a near 50% premium on top of the stock’s closing price on Monday. While Sterne Agee cites valuation as the primary reason -- along with new product opportunities - I do find this upgrade a bit worrisome.
This stock had been trading with gains of more than 100% over the last year, until it recently issued weak Q2 guidance. Currently, it is trading at 31 times next year’s earnings, about half the premium placed on big-data and supercomputer competitors such as IBM and Hewlett-Packard.
During its last quarter, the company’s revenue declined 30%. Thus I find it very difficult to call this stock a "buy." It simply has too much competition from large companies, and without any stable source of growth.
“Buy” Rating Highlights This Stock's Long-Term Upside
High-flying BioScrip (NASDAQ: BIOS) saw gains of more than 3.5% on Tuesday, after Jefferies initiated coverage with a “Buy” and a $17 price target. It awarded that outlook for a 30% premium based on expectations "for sustained, robust top line and EBITDA growth over the next five years." In addition, Jefferies also notes BioScrip's likelihood of "incremental market share gains."
During the last quarter, the company grew by more than 25%, and Jefferies notes that it's expected to see continued growth over the next five years. BioScrip helps health-care clients deliver clinical management services in an array of settings.
In my opinion, with such strong top-line growth, this could be a very good year for shareholders. However, the company must find a way to increase its $11 million in operating cash flow and its 3.24% operating margins. Simply put, the market expects operational improvements. If BioScrip can deliver, Jefferies might very well be correct in its assessment.
Moderate Growth and Lack of Catalyst Doesn’t Bode Well For Short-Term Performance
Cubist Pharmaceuticals (NASDAQ: CBST) rallied 3.70% as Cantor Fitzgerald upgraded shares to “Hold” from “Sell,” and raised its price target from $40 to $49. With Cubist currently trading at $55.50, this upgrade is actually a bit negative, since the targeted price is below its current price.
The firm notes that concerns of generic competition have abated. But with no immediate catalyst to drive Cubist shares higher, Cantor Fitzgerald thinks that investors will have a chance to buy at a cheaper price.
Since Cubist has almost $1 billion in annual sales and single-digit growth, I tend to agree with Cantor. This company's next major catalyst of hospital pneumonia data won't be ready until at least 2015. Therefore, I think a price target of $40 is fair at this time.
With that said, investors should note that there are a lot of moving parts with this company. Recently, it has been linked as a bidder for the antibiotic manufacturer Optimer Pharmaceutical.
Cubist manufacturers a drug (DIFICID) for Clostridium difficile-associated diarrhea (CDAD) and a drug (ENTEREG) that accelerates the time to upper and lower gastrointestinal (GI) recovery. Cubist is already a partner with Optimer in the co-development of DIFICID. However, an acquisition could accelerate growth and allow Cubist to utilize Optimer's pipeline and further develop DIFICID at a quicker rate in clinical trials.
DIFICID is currently being tested to treat CDAD in patients undergoing hematopoietic stem cell transplantations, and for patients under the age of 18. If successful, these indications could double the drug's revenue, thus making Optimer an attractive acquisition target for Cubist.
Each of the noted upgrades on Tuesday were somewhat under-the-radar, but important nonetheless as part of your due diligence. Furthermore, I think all of the calls were logical and without a presence of emotion that is typically seen with day-to-day calls. The key point to remember is that these calls are the opinion of one firm, and that no single opinion should be used to dictate your investment decisions.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Cubist Pharmaceuticals. 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!