Investing

6 High-Profile and Controversial Analyst Downgrades

Investors hear it in the financial media all the time: Strong Buy, Buy, Outperform, Overweight and the like. What they hear less of than brokerage firms telling them to buy stocks is when it is time to get out. Many brokers and investors alike just have a hard time taking profits or taking a loss to move on to the next thing. It is less frequent that investors hear a firm say “sell” or “Lock in those gains now!”

24/7 Wall St. has tracked six high-profile downgrades that took place this last week. Some may not sound like “Sell” ratings on the surface, but some certainly do. These high-profile downgrades also had some controversy around them because the analysts stuck their necks out and could look pretty silly if the investment thesis turned out to be wrong.

We already know that selling creates two events, outside of commissions and trading fees that is. If there is a profit it creates a taxable event, all other positions considered static. If the stock is sold at a loss, it means that the broker or investor has to admit that they were wrong. These are the six high-profile and controversial downgrades covered by 24/7 Wall St. from this last week.

Apple Inc. (NASDAQ: AAPL) was a freight train that just could not be stopped ahead of its iPhone 6 launch announcement expected in the week ahead. That freight train was finally stopped as two analysts came out very cautiously here. Oppenheimer transferred coverage with a Perform rating, yet most of the commentary sounded like Buy ratings (Outperform in their case) rather than “Hold” equivalents.

The larger Apple controversy came from Pacific Crest, which sort of had a “downgrade-light” call ahead of the release. It said Apple will have to blow the doors off the hinges with massive new profit potential to keep from being downgraded, and the firm even warned that it is ready to downgrade the stock from its current rating of Outperform if the news is not phenomenal on the heels of a 40% run since late April. It is not usual for analysts to warn that they will downgrade a stock. Apple shares peaked at $103.74, but the close of $98.97 on Friday was nearly 5% off of that high — and close to $30 billion in market cap wiped out.

ALSO READ: 9 Analyst Stocks Under $10 With Massive Upside Potential

Bank of America Corp. (NYSE: BAC) was downgraded on Thursday by Nomura to Neutral from Buy and with a $17 price target. This may not sound like a “Sell” rating equivalent on the surface, but this is a key call. Bank of America’s massive $16+ billion settlement is supposed to get it out of the woods and is supposed to help it join other banks in its quest to reach book value again.

Bank of America’s stated book value is $21.16 per share, its tangible book value is $14.24 per share and the bank has already been cleared for a normalization of payouts with its first dividend hike. Most analysts were upbeat after the settlement, but not Nomura. Maybe our September 2 take that Bank of America is still in big trouble had more merit to it than the trading activity most of this past week had indicated.

GoPro Inc. (NASDAQ: GPRO) was downgraded to Neutral from Overweight by J.P. Morgan on Thursday, with a $51 price target. Keep in mind that its stock has now doubled from its post-IPO low, and it managed to rally on the week. Still, J.P. Morgan was listed as the first of the book-runners in the S-1 filing. It has hardly been a month since the quiet period allowed J.P. Morgan to issue its initial Overweight rating in the first place.

UBS did not downgrade GoPro this week exactly in another analyst call, but it was listed as one of the overbought tech stocks that could fall big if things don’t keep surging. GoPro shares were down by 5% at $56.86 in early bird trading indications when the downgrade took place, but a 10%+ gain to $58.75 on Friday was only trumped by Friday’s new high print of $59.24.

3D Systems Corp. (NYSE: DDD) is still arguably the king of 3D printing in terms of revenues, but the lousy stock performance now has its market cap under that of competitor Stratasys. Pacific Crest had started coverage of 3D Systems with an Outperform rating and $96 price target, and it had maintained that formal Outperform rating the whole way down. The stock was around $76 when that call was made, and then shares hit the mid-$90s by the end of December. Well, it wasn’t until the start of February that 3D Systems had fallen into the $50s and $60s, and now shares are at $51.31.

Pacific Crest feels that the number of acquisitions is stretching 3D Systems thin. Most analysts might consider upgrading the stock after a 50% haircut from the peak, but Pacific Crest had that Outperform rating on for so long that it felt little option — and this gets the firm in line with other high-profile downgrades in 3D Systems this year as the consensus price target is now hardly $59.

Norwegian Cruise Line Holdings Ltd. (NASDAQ: NCLH) was downgraded to Neutral from Buy at Goldman Sachs on Thursday. The firm kept its $38.50 price target in the call. What is controversial here is that Norwegian’s shares rallied more than 10% on news that it was spending $3 billion to buy Prestige Cruises so that it will own the Regent and Oceania cruise line brands. The stock traded as high as $37.50 (from under $33.50) on the buyout news but settled in at $36.10 during the week.

This buyout was a key acquisition of two premium lines that cater to high-end travelers, and the addition should add serious revenues and come with higher margins after the buyout costs are factored in. The consensus analyst price target is above $39, and the highest price target is $44. Most investors (and analysts) cheer when an acquiring company rallies on news that it is spending so much for an acquisition.

READ ALSO: 5 Overbought Tech Stocks That Sell Off Big

PetSmart Inc. (NASDAQ: PETM) technically is not a downgrade, but it is at the same time. Merrill Lynch had previously dropped it from coverage in July because the pop in stock had the shares trading off-base from the underlying business fundamentals.

Now the Merrill Lynch team issued an Underperform rating on Friday with a $55 price target. This was effectively a “Strong Sell” when you read through the details of the analyst report. What the firm is saying is that PetSmart is almost 25% overvalued, and the firm said there is no doggone way it gets acquired. It was a bold move, but the negatives in the call and the limited upside expected from other analysts sure made a strong case. The consensus analyst price target is well under the $71.83 close at about $64.25, but Merrill Lynch is far more negative here.

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