When an analyst downgrades your stock to “sell,” it’s usually a harbinger of a lot of bearish pain to come.
I say “usually,” because sometimes investors pay little or no attention to the proclamations of the pundits. In fact, sometimes the buying impetus in a sector is strong enough to trump the naysayers in spite of their gloomy outlooks.
This is precisely what happened to shares of Lowe’s (NYSE:LOW) this week. On Monday, Canaccord Genuity analyst Laura Champine moved the shares from an already bearish “hold” rating to an even more bearish “sell.” Her 12-month price target on the stock is $27, which represents a roughly 25% drop from current levels.
In her note to clients, Champine explained that the company’s recent management changes and store improvements do not seem to be effective growth drivers. She called Lowe’s restructuring efforts “misguided” and “counterproductive.” Champine also said Lowe’s efforts to overhaul its product mix have not accomplished the goal of generating additional sales.
Now, I don’t pretend to follow Lowe’s as closely as Champine, so her insight into the company certainly is much more researched than mine. However, one doesn’t need to be an expert on housing and home improvement stocks to know that the smart money has basically brushed any negative dirt off the sector’s shoulder.
Click to Enlarge After an initial slide in LOW on Monday following the Canaccord downgrade, buyers stepped back in and bid the stock up about 3% by Friday’s close.
That rebound is part of a wider bullishness in housing-related stocks of all varieties.
Over the past 12 months, Lowe’s shares are up 36%. Rival Home Depot (NYSE:HD) shares are performing even better, with shares soaring nearly 50% over the past year. Homebuilding stocks also are up big, with companies like PulteGroup (NYSE:PHM) up 150% over the past year, Lennar (NYSE:LEN) up 84% and KB Home (NYSE:KBH) up more than 90%.
Of course, one of the reasons why Champine downgraded LOW is because of its big run higher, but the logic of downgrading a stock because it’s “too successful” always escapes me.
Click to Enlarge This is the same logic that leads many novice investors to avoid buying stocks if they’re trading at or near a new high. Well, how do you think a stock like HD goes from $42 at the beginning of 2012 to its current price of $63.50? It does so by making new 52-week highs all along the way.
Now, I am not arguing that a stock like LOW or HD will continue to rise indefinitely. What I am arguing is that a big run higher in a stock is not a reason to slap it with a “sell” rating. As for the fundamental aspects of the Champine downgrade, however, I acknowledge that she could indeed be correct about the management changes and the revamped product mix.
We’ll see how accurate her predictions turn out to be in about six weeks, as Lowe’s is slated to report its fourth-quarter earnings results on Feb. 25. The company’s revised outlook (due to the effects of Hurricane Sandy) for full-year guidance of $1.64 per share could be key, and if earnings fall short of that amount — and/or if same-store sales figures fall short of expectations — it might cause buyers to move out of LOW.
Until then, a better gauge for investors of the fitness of LOW and HD will be the price action — action that still portends more bullishness on the horizon.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.