Jubak's Journal
Recent articles:
• Newest winners get there first and flashiest, 7/13/2004
• The next wave of airline bankruptcies, 7/9/2004
• 5 short-squeeze candidates, 7/7/2004
More...
| | Jubak's Journal
Jubak: 5 stocks ready to bounce back
Analysts, who rarely venture from the pack, love to downgrade the same stock. But their collective actions often push a stock down too far.
By Jim Jubak
Wall Street loves to kick 'em when they're down. But when analysts pile on to downgrade a stock thats already tumbled, savvy investors look for signs that the shares have bottomed, at least in the short-run, and may be ready to bounce back.
The psychology works like this: No analyst wants to be out there with a buy recommendation when a stock is down 10% or more. Even if the call is right in the long-term, the analyst takes heat from clients and peers in the short term. So it's better to retreat to the pack, even if the price decline has made the stock a better value than when the analyst originally recommended it. Once the analysts smell blood in the water the momentum behind the downgrades almost guarantee that the sell-off gets overdone.
Of course, once a modest stumble has turned into a punishing rout, the depressed stock starts to attract interest from an analyst or two. Once a few analysts start recommending it on value, its not long before the pack starts to consider piling back on. Then the stock gets driven too high from too low, setting up the process to begin all over again.| MSN Money term of the day Which of the following words can be defined as To try to discredit? |
Lately, analysts have been picking on technology stocks. Inventory is building up, the argument goes. Some companies have warned about unexpected second-quarter weakness, and analysts have been quick to expand those specific cases to general sector weakness. Few tech companies are promising great things for the third quarter, which has analysts worrying about a weaker-than-expected third quarter. Many analysts seem willing, as they do every year, to overlook the seasonal patterns that make the second quarter the weakest for technology stocks year in and year out.
Closer to the top?
Frankly, I dont know where we are in the technology recovery. We could be closer to the end of the upward stage than technology bulls hope. But some of the recent downgrades for stocks the market already hates have the air of an overreaction that precedes a recovery, at least in the short term.
To find stocks where analyst downgrades are potential signals that a stock has been oversold and is ready for a turn around, I built a simple screen on CNBC.com on MSN. To make the cut, a stock had to have a market capitalization above $500 million. I looked for stocks where an analyst had changed a recommendation in the last week, which pulls up both upgrades and downgrades. This means youll have to go through the list one-by-one to find the downgrades. I also looked for a stock that had tumbled at least 10% in the last month. Finally, to make sure I wasnt buying a dog, I required stocks to have a StockScouter rating of 7 or better on our 1-10 scale.
Click here to see the screen.
The names pulled up by this screen change rapidly. When I ran the screen Monday, these five stocks looked like the best "kick em when theyre down picks.
These first three of these I recommended in my regular weekly appearance on CNBCs "Morning Call" Wednesday.
A huge downgrade
Xilinx (XLNX, news, msgs). Xilinx received its most recent downgrade as part of Merrill Lynchs downgrade Monday of just about the entire chip sector. Merrills analysts noted that they werent seeing the level of buying to rebuild inventories that they had hoped to see and feared that the sector would move into oversupply in 2005, earlier than theyd expected. That would push down chip prices, eating into margins and earnings.
Chip stocks, Merrill concluded, were close to a peak for this cycle. With that, Merrill moved Xilinx to "neutral" from buy. Given Wall Streets reluctance to ever say sell, thats a huge downgrade.
In response First Albany, a house with much less clout than Merrill, argued that Wall Street was making a mountain out of molehill on issues like inventory rebuilding. Customers up and down the chip supply chain are being very cautious about buying equipment and adding to inventory because they remember getting caught on the wrong side of the supply/demand curve in 2000-2003. That caution extends to forecasts for the third quarter: CEOs would much prefer to under-promise and over-deliver.
The third quarter, First Albany expects, will show the usual seasonal pickup after the weak second quarter. What interests me as an investor here is the likelihood that Xilinxs price includes all the bad news in the Merrill report and more. For example, Lehman Brothers cut its earnings estimates for Xilinx for 2005 to $1.35 from $1.40 and its target price to $40 from $48. But it kept its recommendation at "1-overweight," the companys highest rating, because the $40 target represented a potential 27% gain from the stocks' recent $31.40-a-share level. Even Merrills bad news valuation of the stock shows that Xilinx is about 7% undervalued.
The bad news and more is already in the stock price, I believe, and Xilinx is ready for a rebound on even modest results. Xilinx is scheduled to report earnings on July 22.
Falling recommendations
International Rectifier (IRF, news, msgs). The maker of power-management chips received its own downgrades about a week before Xilinx. On July 6, investment bank Stephens cut its recommendation to "equal-weight" from "overweight." Two days later, Harris Nesbitt downgraded the stock even more dramatically, to "neutral" from "outperform."
In the last month, the consensus estimate for the fiscal year that ended in June has fallen to $1.59 from $1.63. The share price has fallen much faster: International Rectifier shares were down 15% in the 30-day period that ended July 13. The stock trades at just 22 times the fiscal 2004 consensus estimate. At that price, even Lehman Brothers, which slashed its target price on the stock to $42 from $52, still rates International Rectifier a "1-overweight." International Rectifier is scheduled to report earnings on July 29.
A wholesale revulsion
Veritas (VRTS, news, msgs). The software storage maker has been downgraded by just about everybody but my Uncle Eddie.
On July 6, Buckingham Research cut its recommendation to "neutral" from "strong buy," and J.P. Morgan cut its to "neutral" from "overweight." No wonder the stock was down 31% in the 30-day period that ended July 13.
The slaughter was just part of Wall Streets wholesale revulsion with the software sector after earnings warnings from Siebel Systems (SEBL, news, msgs), JDA Software (JDAS, news, msgs), Kana Software (KANA, news, msgs) and Veritas.
Veritas' second-quarter warning that earnings would be 20 cents a share rather than the 24 cents Wall Street was expecting was especially damaging since the company had confirmed higher projections on June 14, when it also announced that it would restate its financial statements for 2001 through 2003. Because of all this trouble, the stock now trades at just 20 times the lower Wall Street consensus for earnings of 91 cents a share for 2004. Veritas is scheduled to report earnings on July 27.
2 exclusive picks for CNBC.com
Analog Devices (ADI, news, msgs). It was part of the Monday Merrill massacre. Merrills downgrade to "neutral" from "buy" is even more shocking when you look at the target price shift. Merrills target price goes to $40 from $62. But once again, thanks to the stock's 11% decline, that "bad news" target price represents just 7% downside on the stock. If Merrill is wrong, however, and the semiconductor cycle remains intact as Morgan Stanley argued in a research "rebuttal on Tuesday, then the target price for Analog Devices is more like the $60 I set when I added the stock to Jubaks Picks. That upside/downside potential seems reasonably attractive to me. Analog Devices reports on Aug. 12.
Micron Technology (MU, news, msgs). It didnt make the list generated by my stock screen. Sure, it got the downgrade to "neutral" from "buy" Monday from Merrill, its market capitalization is $8.6 billion and its StockScouter rating is a 7. But the stock hasnt taken the same pounding as my other four picks: Its actually up 1% in the last 30 days.
So whats it doing here? The stock has failed to climb in the face of some solid growth in the market for memory chips (DRAM), and thats created the same value gap that a price decline produced in the other four stocks. According to the Semiconductor Industry Association, total chip demand grew by 11% in the second quarter's first two months compared with the first quarter's first two months.
But growth in demand for memory chips outstripped that in any other sector: Growth of 30% in the DRAM sector was almost twice as high as in the second-place flash sector at 17%. Because of that growth rate, Micron offers a high degree of leverage -- and potential profits -- if the chip cycle isnt slowing as much as recent downgrades argued. Micron reports results on Sept. 22. In its May quarter, Micron earned 13 cents per share, a huge 62% above Wall Street projections.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities: Analog Devices. He does not own short positions in any stock mentioned in this column.
|
