Analyst stock upgrades are something many retail investors follow religiously to gain an edge in their investment selection.
While I don’t have any empirical data to demonstrate whether analysts are good or bad at picking stocks, I think they tend to offer up buy ratings much more than sell calls. Long-time market follower Mark Hulbert recently reported that only 5.6% of analyst ratings for S&P 500 companies fall into the sell category, suggesting that if you own a stock that gets an outright sell, you might take it more seriously than a buy recommendation.
“Don’t assume that the lopsided plurality of ‘buys’ over ‘sells’ is bullish,” Hulbert recently wrote in MarketWatch.
Interestingly, Hulbert writes, the National Association of Securities Dealers adopted a rule in 2002 that required stock brokers to reveal their buy, hold, and sell recommendations to the public. It was a way of shaming them into making more sell calls. It didn’t work.
According to Hulbert, upgraded stocks have failed to outperform the index since the rule came into effect. Before the rule, they beat it.
Don’t say you weren’t warned.
Here are three analyst stock upgrades to consider.
Azul (AZUL)
Azul (NYSE:AZUL) is a Brazilian-based airline founded by former JetBlue (NASDAQ:JBLU) founder David Neeleman in 2008. The airline has a $1 billion market capitalization. Its shares are up more than 68% in 2023.
On Sept. 20, Goldman Sachs upgraded the airline’s stock to buy from neutral. Analyst Bruno Amorim also upped his price target by $3.40 to $18.30. Up 14% on the news, the analyst’s target is nearly double its share price.
Two days before the Goldman upgrade, JPMorgan upgraded Azul stock to Overweight. Of the other 11 analysts that cover the airline’s stock, five rate it a buy, while six have it at Hold.
Azul held its 2023 Investor Day recently. The company emphasized the strength of its travel network, which flies to 155 domestic destinations in Brazil, 3x its competition, while also providing seven international destinations including Miami, Orlando, Lisbon, and Paris.
With its shares trading below its 2017 initial public offering at $21 a share, aggressive investors are wise to take a closer look.
Lululemon (LULU)
Several analysts have upgraded Lululemon (NASDAQ:LULU) in September.
On Sept. 5, Alliance Bernstein analysts upgraded the leisure apparel company’s stock to ‘market perform’ from ‘underperform’. While the move isn’t a buy rating, it’s the direction that counts. Alliance Bernstein argued that because Lululemon’s sales growth has normalized, it is easier to be more optimistic about its long-term growth story.
On Sept. 20, Needham analyst Anna Andreeva initiated LULU coverage with a buy rating and a $470 price target. Andreeva believes that its move into new sports, such as golf and tennis, will help generate new customers and growth for the business. It expects double-digit top-line growth in the future.
“We also anticipate profitability upside, aided by China, LULU’s 2nd most profitable region, scaling to corporate margins and generating $4-plus per share in earnings power, up from less than $1 currently,” The Globe and Mail reported.
I’m a big free cash flow person. The analyst believes its free cash flow per share will triple in 2023. What’s not to like?
Pinterest (PINS)
I’ve remained a fan of Pinterest (NYSE:PINS) over the past couple of years despite PINS stock getting hit hard. Down 68% since its April 2021 highs, it’s come around in 2023, up more than 20%.
D.A. Davidson analyst Tom Forte upgraded Pinterest on Sept. 20 to buy from neutral, increasing the price target by $10 to $35, or 40% higher than where it’s currently trading.
Pinterest held its annual investor day on Sept. 19. Analysts, especially Forte, liked what they heard. CEO Bill Ready told investors that it’s returned to growing its monthly active users (MAUs), which should translate into mid-to-high teens revenue growth and adjusted earnings before interest, taxes, and depreciation (EBITDA) margins over 30%.
Barron’s reported Forte’s comments:
“Our upgrade is a reflection of our confidence in management’s ability to achieve those financial targets by: increasing engagement on the platform, improving its monetization in not only the U.S./Canadian region but also the European and Rest of World geographies, and sustaining financial discipline (when it comes to investing while maintaining high margins).”
In addition to Forte, Citi analyst Ronald Josey upgraded PINS to buy from neutral due to the company’s efforts to improve user engagement over the past year. He’s got a $36 price target.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
