Analysts are the bookies of the finance world. They set the odds, weight the players and make calls that can drastically influence the market. In many cases, it is the analysts that do the reports that help investors understand the dynamics of the company, that crunch the numbers on highly-sourced sites like Yahoo! Finance and that downgrade or upgrade stocks. Granted, all analysts don’t do all jobs, and some are better than others, but when one downgrades a stock, it is worth a second look. We also think that analyst downgrades carry a bigger weight than analyst downgrades because of all the pushback analysts receive when they express negative views about the stocks.
Analysts downgraded the following stocks this week:
Amazon.com Inc (AMZN) is a retail services company with a $98.45B market cap. AMZN is trading at 113.94 times its earnings. Its most recent trade price is $217.99, down from a 52-week high of $246.71. Oppenheimer cut AMZN’s estimates and target, given lower than expected margins. It also downgraded AMZN to an outperform rating. We recently took a closer look at AMZN and compared it with Walmart (WMT), Sears (SHLD), and Overstock.com (OSTK). We don’t think AMZN is a great investment because of its lofty valuation multiples. Amazon’s PE ratio is almost 10 times higher than Walmart’s which implies that it is priced for perfection. We are long-term investors and we like to play safe. That’s why we picked WMT over AMZN.
Ford Motor Co (F) is an automotive company with a $42.03B market cap. F has a P/E ratio of 6.75. It recently traded at $11.61 a share, near the lower end of its 52-week range of $9.05 to $18.97 a share. Morgan Stanley reduced F estimates through 2013 after the company lowered its outlook. F now has an overweight rating and an $18 price target. Ken Heebner’s Capital Growth Management had more than $230 million in the company at the end of the second quarter. We think automotive companies are undervalued relative to their normalized earnings. However, we prefer General Motors over Ford because GM doesn’t have the pension and healthcare liabilities. David Einhorn agrees with us, building a large position in the stock at an average price of $25.78 (read Greenlight’s Q3 investor letter).
Freeport-McMoRan (FCX) is a metals and mining company with a $38.22B market cap. It has a P/E ratio of 6.69. It recently traded at $41.89 a share, in the middle of its 52-week range of $28.85 a share to $61.35. UBS lowered FCX estimates through 2012 on issues of near term uncertainty over its Grasberg mining complex. On November 3, Barclays Capital initiated a rating for FCX, labeling it overweight. On October 28, Standpoint Research downgraded FCX from buy to hold. Ken Fisher had a large position in FCX at the end of June, as did Peter J. Eichler Jr.’s Aletheia Research And Management. We think FCX is an inexpensive stock. We wouldn’t short it.
Prudential (PRU) in a $25.78B market cap insurance company. It is trading at 8.22 times its earnings, at $54.48 a share, near the middle of its 52-week range of $42.45 to $67.52 a share. Bank of America/Merrill Lynch reduced PRU estimates through 2013. PRU is a popular stock with Jeffrey Altman’s Owl Creek Asset Management. We wouldn’t short Prudential because it has a low PE ratio. If the stock declines significantly, it may even be a buying opportunity.
Illinois Tool Works Inc (ITW) is an industrial goods company with a $23.13B market cap. It has a 12.40 P/E ratio. ITW recently traded at $48.98, in the middle of its 52-week range of $39.12 to $59.27 a share. Citigroup downgraded ITW from buy to neutral, setting it a $52 price target. The shift came as Citigroup shifted its recommendations toward companies that have higher late cycle mixes. Ric Dillion’s Diamond Hill Capital is a fan of ITW.
