Related Tickers: Six Flags Entertainment Corp (NYSE:SIX), Overstock.com (NASDAQ:OSTK), Newcastle Investment Corp. (NYSE:NCT)
During earnings season, analysts are hard at work to issue revised outlooks, upgrades, downgrades, etc. While many of these calls will move stocks on the call alone, investors shouldn’t fall victim to buying only because of the upgrade. In this piece, I am assessing three calls to determine whether they are good or bad and if the notes warrant the calls.
Newcastle Investment Corp. (NYSE:NCT)
On Friday, shares of Newcastle Investment significantly outperformed the market with gains of more than 4%. The gains were caused by a reiterated “Buy” rating from UBS, with a $14 price target. Currently, a $14 target would insinuate 40% upside. However, the firm explained its call by describing its 14% one-month loss as unwarranted, saying the loss is due to the concerns of a delayed New Residential spinoff. UBS believes that this delay is due to additional filing requirements associated with the acquisition of HSBC servicing assets.
So basically, UBS claimed that presumed fears of the New Residential spinoff are meaningless. While this may be true, UBS is predicting 40% upside on a stock that has lost 14% from this concern. UBS has already said that it believes New Residential is worth $8 per share and that NCT is a deep value stock.
When you look at the fundamentals, you almost have to agree. The stock is a bit pricey, and it has very little room for margin growth. However, 20% fundamental growth this year is very attractive in this economy. The key is if UBS is right about New Residential. But either way, investors must understand that it is a speculative call, one that is risky.
Six Flags Entertainment Corp (NYSE:SIX)
Credit Suisse initiated coverage on Six Flags with an “Outperform” rating and a price target of $87.00. The stock has seen gains of 60% over the last year and Credit Suisse believes it will continue. According to the firm, “upgraded parks, improved marketing, renewed focus on pricing, operating efficiencies, and a healthier balance sheet” are all among the reasons that the firm is bullish moving forward.
Personally, I love this call. Not only are the reasons for the bullish call accurate, but I also consider it to be a responsible call from a respected firm. Far too often analysts make crazy calls for gains of 40%, 60%, even 100%, and often they are trying to make headlines, following the lead of another analyst, or trying to move a stock. Looking at Six Flags Entertainment Corp (NYSE:SIX), a 22% premium looks fair based on its current valuation compared to fundamentals and the factors noted by the analyst. I say it was a great call!
Overstock.com (NASDAQ:OSTK)
Overstock.com continued its post-earning rally on Friday after receiving a two-notch upgrade to “Buy” from BofA. The firm was highly impressed with its 22% partner sales, which were far better than the estimated 9%, and that its lower than expected opex is a sign that the company is improving in efficiency. BofA specifically states, “We believe strong Q1 results are not just a head fake but believe the company is turning the corner.”
For me, there’s no arguing the points made by BofA. On Thursday I published a piece titled, “This High-Flyer is Still Far From Reaching its Worth,” which highlighted the level of value that is present in shares of Overstock.com, Inc. (NASDAQ:OSTK). This is a company that grew 19%, saw margin improvements, and is greatly undervalued compared to its competitors. Even after its large gains, the stock still trades at just 0.34 times sales, compared to five times sales for eBay Inc (NASDAQ:EBAY) or two times sales for Amazon.com, Inc. (NASDAQ:AMZN). If the company can continue to prove its efficiency, then watch out, this could be a high-flyer for many quarters to come.
Conclusion
“Always view an analyst’s call with a bit of skepticism, and focus more on the reasons versus the performance that it creates, “Taking Charge With Value Investing (McGraw-Hill, 2013)”.
Luckily, it appears as though the three calls above were all well-thought and researched. However, this is not always the case, and investors must be cautious and remind themselves not to fall victim to the sudden gains created by an analyst’s call. Instead, focus on the “why” of a call, identify any value it presents, and then make decisions based on these factors.
The article Did These Analysts Make the Right Calls? originally appeared on Fool.com and is written by Brian Nichols.
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