Analyst downgrades can be a valuable tool when making investment decisions. However, just because an analyst has changed his or her rating on a stock from “buy” to “hold,” from “buy” to “sell” or from “hold” to “sell,” doesn’t mean you need to follow suit.
Much like everyday investors get it wrong, and the so-called “smart money” institutional investors get it wrong, the sell-side analyst community can get it wrong sometimes as well.
Here’s a good example. It’s not uncommon for analysts to place too much emphasis on a negative macro, industry, or company-specific factor. Either macro positives counter this or it winds up having a minimal effect.
That appears to be the situation here, with the following seven stocks. All of them have received analyst downgrades in the past week, but here’s why each one remains a buy.
Adecoagro (NYSE:AGRO) is a large agro-industrial company in South America. A producer of grains, oilseeds, ethanol and dairy products, shares are up sharply (42.6%) year-to-date. Largely, due to strong results in recent quarters.
However, after this strong run, analyst Daniel Sasson from Itau BBA has become a little cautious about AGRO stock. At least, that’s the takeaway, based on Sasson’s Oct. 2 downgrade of shares from “outperform” to “market perform.” Yet while another 42.6% run may not be in the cards over the coming year, I wouldn’t immediately dismiss the potential for Adecoagro to deliver outsized gains from here.
Already trading at a discounted 6.5 times forward earnings, if the contrarian view on grain prices proves correct, and elevated prices for food commodities are here to stay, AGRO could re-rate to a higher valuation, as it becomes clear high profitability is here to stay as well.
Emerson Electric (EMR)
In the analyst’s view, additional upside for the stock is limited because of the industrial technology company’s high exposure to the energy sector. Also, there’s uncertainty surrounding the impact on results of two recent large acquisitions.
However, while one analyst has become less bullish on EMR stock, analysts at KeyBanc and Deutsche Bank have issued bullish ratings on shares recently. The Keybanc analyst (Ken Newman) cited favorable demand trends in his bullish initial rating on Emerson Electric.
The Deutsche Bank analysts believe the market undervalued shares compared to peers and the company should beat expectations in its quarterly results this month.
Taking both arguments into account, if you currently hold EMR, you may want to let it ride. These reasons to buy may outweigh Snyder’s “on the fence” view on shares.
NextEra Energy (NEE)
Admittedly, it has not been analyst downgrades that have hammered NextEra Energy (NYSE:NEE) shares lately.
Yes, one sell-side firm (Keybanc) recently downgraded shares in this Florida-based utilities company from “overweight” to “sector weight.”
However, this NEE stock downgrade has been in response to two negative developments.
First, is the prospect of interest rates staying “higher for longer.” Second, is NextEra’s walking back of expectations for its NextEra Energy Partners (NYSE:NEP) renewable energy subsidiary.
Nevertheless, if you’ve been waiting to make this former “green wave” darling a buy, now may be your chance to do so.
Why? After falling 23.8% in the past month, NEE has dropped to a far more reasonable valuation (16 times forward earnings), with a solid dividend yield (3.72%) to boot.
If interest rates come down next year, and today’s growth worries prove to be an overreaction, NextEra Energy could make a strong comeback.
Norfolk Southern (NSC)
On Oct. 2, BofA’s Ken Hoexter downgraded Norfolk Southern (NYSE:NSC). The analyst cited recent data center outages (including one incident on Sep. 29) as a key reason behind his downgrade of the railroad stock from “buy” to “neutral.”
This downgrade, plus the latest data center outage incident itself, have placed pressure on NSC stock. However, you may not want to see these developments as reasons to sell/avoid shares.
While for certain, it’s possible that concerns about the data outages wouldn’t be so high, if not for the Norfolk Southern’s headline-making train derailment earlier this year.
In short, Hoexter and the market right now may be overestimating the operational and reputational risks with the data center issue.
As NSC trades at a discount to peers, and has already written off the likely derailment damages ($803 million), shares could be a buy after this latest round of weakness.
O’Reilly Automotive (ORLY)
O’Reilly Automotive (NASDAQ:ORLY) is another one of the stocks that has received analyst downgrades over the past week, but shares in the auto parts retailer have also been one of the stocks receiving an analyst upgrade over the past week as well.
Oppenheimer’s Brian Nagel downgraded ORLY stock on Oct. 6 (from “outperform” to “perform”) because of less favorable industry dynamics. The previous day Citi’s Steve Zaccone upgraded O’Reilly from “neutral” to “buy,” citing the stock’s appeal as a defensive retail stock.
So, who is most likely on the money here? I’d opt to follow Zaccone’s take on ORLY shares. Zaccone makes a strong point that other factors (like market share gains/improved margins) may counter recessionary pressures.
I’ve called out ORLY as being pricey in past coverage, yet I’ll admit these positives may enable the stock to maintain its premium valuation.
Sandy Spring Bancorp (SASR)
Given the challenges the regional banking industry is facing right now, it’s no surprise that Sandy Spring Bancorp (NASDAQ:SASR) has just received an analyst downgrade.
On Oct. 2, DA Davidson’s Manuel Navas downgraded SASR stock from “buy” to “neutral,” due to the current interest rate outlook.
In Nava’s view, “higher for longer” is bad news for Sandy Spring’s commercial real estate lending operations. Yet while interest rate headwinds are clearly in play here, as I argued last month, this may already be accounted-for in SASR’s valuation.
How so? After plunging in price over the past year, this bank now trades at a 40% discount to book value.
Following the current storms, and once interest rates head back lower, SASR could make a very strong recovery. While this smaller name may be riskier than many other downgrade stocks, upside potential may exceed this risk.
Tractor Supply (TSCO)
Interestingly enough, this downgrade was another new rating from Citi’s Steven Zaccone. Zaccone included the downgrade of this retailer alongside the above-mentioned upgrade of ORLY stock.
Zaccone now rates TSCO stock at “neutral” rather than “buy,” following the latest store traffic channel checks.
Yet while Zaccone may be right about O’Reilly, it’s possible his view on Tractor Supply is too pessimistic. With shares already sliding in recent months, the prospect of a consumer slowdown could already be priced-in.
Shares today trade for around 20 times earnings. This valuation may be more-than-fair, given the potential for an earnings growth resurgence in 2024 and 2025.
Tractor Supply is also appealing as a dividend growth stock. TSCO’s dividend payouts have increased by around 28.2% annually over the past five years.
On the date of publication, Thomas Niel did not hold (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.