What’s the proper role of the analyst? Is it to call a top or a bottom? Is it to offer insight that no one else has? Is it to highlight opportunities to buy or caution them to sell?
Monday was a demonstration of pretty much everything analysts can throw at stocks to get you out while the getting is still good. It’s fascinating to see all these downgrades on display in one day, but it comes after a huge winning streak for all kinds of stocks and the downgrades are all well-reasoned and action oriented.
In fact, given the paucity of upgrades I would say the analysts played a very negative role in the session. Again, after the run we have had I will pay close attention to these downgrades because I believe that bulls make money, bears make money, but hogs get slaughtered. That’s something I learned thirty years ago and it has NEVER gotten me in trouble as much, however, as it has caused me to miss out on some further upside. That brings up another rule, no woulda shoulda couldas. I am filled with rules today and you should never second-guess the winners, only the losers.
Enough platitudes. Let’s roll up our sleeves and go to work assessing the Augean stables to see what can be cleaned up and see what’s too hard to go against.
Let’s start with General Electric (GE) . This morning Steve Tusa of J.P. Morgan, one of my favorite analysts, the man who got you out of GE 18 points ago, went from hold to sell on the stock. In truth he’s been consistent in not liking the shares for some time. But having a “hold” on it could imply that he thinks the next move could be up.
After Monday, when he cuts his price target to $5 from $6, we know he isn’t about to change his opinion.
I like his thinking about why. He is saying people are too bullish and there are a lot of things that could go wrong, especially if there is a recession. Tusa is concerned that investors are quite taken with what CEO Larry Culp is doing but that the enthusiasm has morphed into too much optimism, especially given the structural problems in the power division and its capital arm, among other liabilities.
I like what Larry Culp is doing. He came on Mad Money and I was thrilled that he’s such a breath of fresh air. I like his plan. I think 2019 is a reset year and 2020 is a year of real earnings progress. That’s the polar opposite of Tusa’s thinking.
Tusa says the problems are just too great. There is nothing negative about Culp. It’s all based on cash flows and is very well-reasoned, although I take issue with Tusa’s assertion that GE is not necessarily accounting for its aviation cash flow in a fair way making the picture too rosy.
To me Tusa could be right for a couple of points but then you might want to get in if Culp demonstrates that there are more brilliant sales like GE’s life sciences business to Danaher (DHR) for $21.4 billion. So, short-term Tusa could be right. Long-term I am betting with Culp.
Boeing’s (BA) next. A brutal downgrade from buy to hold by Bank of America Merrill Lynch contributed to the decline in this Dow stock and I have to say I found it a compelling piece of research.
Let’s define what a good piece of research is.
To me it’s one where numbers are slashed ahead of other analysts and a case can be made by the portfolio manager that it is not too late to sell. That’s pretty much everything you got here, a well-reasoned piece that argues there is no quick fix to the issues that apparently bedevil the most popular plane Boeing makes, the 737 MAX.
Therefore, Boeing’s making production cuts and that means numbers and cash flow take a real hit. The analyst had hoped the delay would only last three to six months. Now he says that it could take six to nine months and the company will only produce 42 per month versus 52 a month. The guts of the call: Boeing will now have a big down year, earning $11.80 per share, down 26% from last year. Portfolio managers decidedly do not like to own stocks of companies with down years. I am a big Boeing supporter. Have been for years. But this downgrade has gravitas and with the stock up 15% this year and things so uncertain I think the downgrade is warranted.
There’s fallout all over the place from Boeing’s issues. The one I most care about? Southwest Airlines (LUV) , where Raymond James calls out the near-term earnings risk because of the grounding of the MAX fleet. I get this one BUT they estimate cuts that are meager: $4.45 in 2019 goes to $4.40 and the $5 2020 estimate is kept, which makes a little dubious. To me, this is a downgrade that just encourages you to buy the stocks of other airlines with less Boeing MAX exposure, American Airlines (AAL) and United Continental (UAL) , perhaps the most important line in the entire downgrade.
Micron’s (MU) stock has been downgraded more frequently than just about any stock in the market. After a weak last quarter Micron cut production and talked about reducing inventory. The stock’s been on fire since then and it is up 35% for the year.
The gist of this downgrade, which is by Cowen? While Micron cut production it won’t matter because there could be another decline in DRAM pricing next year and the bulls are way ahead of themselves. Analysts have been fighting this move off the bottom tooth and nail arguing that there are many more number cuts ahead. Cowen is saying that Micron will earn $6.37 per share in 2019 and $4.87 in 2020.
You would sell this stock nine ways to Sunday if the analyst has it right. I just don’t think he does. I believe the economy is going to strengthen and Micron’s business and 5G’s introduction will help, too. I would stay long Micron but I like Nvidia NVDA a lot more because it isn’t commodity and Micron is so there is protection from the Samsungs (SSNLF) of the world.
Then there is Clorox (CLX) . J.P. Morgan takes a big swing at Clorox knocking it from hold to sell. Let me first say that Clorox is an extraordinarily good company led by an extraordinarily good CEO, Benno Dorer. J.P. Morgan says that Wall Street’s estimates are too high and is taking them down because of a decelerating benefit from rising prices. The analyst goes from $6.34 down to $6.26, not necessarily a big deal except Wall Street’s at $6.32.
If Clorox does what J.P. Morgan says then this stock will get whacked. Do I think it’s right? The analyst is pretty negative on market share for Kingsford and for trash bags.
My take? I think that the stock’s been coming down from $167 to $153. Any further decline and I do not believe the stock will get hit when it reports, which is what matters.
Finally, there’s one more kind of downgrade: the UBS buy to hold on Starbucks (SBUX) . This is a victory downgrade. The analyst rode the stock up huge — 55% from the bottom — and now thinks that all the good news is in the stock. This is a bulls, bears, pigs downgrade and I can’t criticize it. That said, if it came back in, I think it would be a wrong call to stay on the sidelines as a hold implies.
So, we’ve got some powerful downgrades from analysts who can’t be as positive as when stocks were lower especially if the facts changed. If you don’t agree I urge you to consider the bear cases on all of these stocks. They may turn out to be very right.Get an email alert each time I write an article for Real Money. Click the “+Follow” next to my byline to this article.