Veolia Environnement SA (ADR) (VE), Incyte Corporation (INCY), Cliffs Natural Resources Inc (CLF): 3 Great Downgrades You Should Know About

Credit Suisse notes that because of lower prices, the company will generate just 16% to 23% EBITDA margins, rather than the 40% to 50% margins that we’ve seen in years prior. The firm translates this to annual operating earnings of just $200 million to $300 million, and with a historical multiple of five, the company’s worth becomes $1.5 billion to $2 billion — half its current valuation.

The problem for Cliffs Natural Resources Inc (NYSE:CLF) is its $3.1 billion in net debt, which has risen each of the last four years. Credit Suisse doesn’t think Cliffs Natural Resources Inc (NYSE:CLF) will be able to meet these obligations. With that said, Credit Suisse’s call was thorough and displayed exactly what you want to see in a call.

Credit Suisse explained in detail the reason for its $10 price target and demonstrated a scenario for how it could occur. Granted, these headwinds (e.g., lower iron-ore prices) may not materialize, but like I had said, being right isn’t necessarily what’s important, but rather being informed about the operational facts regarding a company. Calls like this, if nothing else, give investors more information to work with.

Final thoughts

A good call is not determined by whether or not an analyst is right or wrong. Bill Ackman’s call on Herbalife was one of the most well-researched and thorough reports I had ever read, yet the stock has ticked higher since then. A good call is characterized by sound reasoning, a price target that is justifiable, and information that investors can incorporate into their own investing theses.

Firms that downgrade stocks based primarily on their performance aren’t doing investors much good. For example, B of A, Morgan Stanley, Cowen, and the countless other firms who downgraded Aeropostale following its second-quarter report didn’t benefit investors, as most of the stock loss had already occurred. Meanwhile, a call that aims to logically forecast a storm before it hits is useful to investors, and with the three downgrades discussed here, I think analysts did a great job.

The article 3 Great Downgrades You Should Know About originally appeared on Fool.com and is written by Brian Nichols.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Veolia Environnement (ADR).

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