Sorry, but Wall Street is wrong about these stocks


Generally speaking, I tend to listen to the advice of Wall Street analysts, but while I always listen to their views and opinions, I do not always buy into what they are saying.

I firmly believe there is a lot to learn from analysts’ opinions, especially for the average investor who does not have the luxury of spending all day doing research and homework on the stock market.

Analysts do exactly this for a living, five days a week, so the insight they are able to offer on the market and specific securities is highly valuable and always worth paying attention to. Having said that, everyone makes mistakes. We would not be human otherwise, and even the sharpest analysts get a pick wrong from time to time.

Unfortunately there is no way to know whether analysts are right until history plays itself out, and by then, you could find you have lost a lot of money by blindly following the advice of an analyst that got it wrong.

The point of all this is that you need to listen to the advice of analysts, but always do your own homework and follow-up research before simply buying and selling on their advice.

This week I want to take a look at five examples of recent broker upgrades or downgrades that I simply do not buy into. Time will tell whether or not the analysts has it right, or if perhaps they dropped the ball on their recent research advice, but at this point I just can’t get on board with their recommendations.

Computer Sciences Corp.

Computer Sciences (CSC) offers IT services and solutions, and the stock is currently trading just shy of its 52-week high. The stock was upgraded on December 9 by Jefferies to “buy” from “hold”, with a $37 price target. The firm noted that it expected the company to turn around its weak revenue growth, and expand margins. The biggest problem I see with buying into CSC at the current time is the stock’s astronomical valuation. CSC trades with a P/E of 204, and while analysts do forecast 12% earnings growth next year, that earnings growth is simply not high enough to warrant such a high valuations. With the stock trading just shy of its 52-week high, and a P/E ratio north of 200, I think now is not the best time to consider establishing a new position on the stock.


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Newmont Mining

Gold explorer Newmont Mining (NEM) received an upgrade from Zacks Investment Research to “buy” from “hold”. The stock has suffered due to weakness in the commodity market, and while Zacks believes the stock is a buy, I would still suggest avoiding the stock until stability returns to the gold sector. Most analysts agree that the Federal Reserve is going to lift interest rates for the first time in nine years in the foreseeable future, with a December rate hike looking like a real possibility. Higher rates would be bearish for gold and other commodities, which is a primary reason I would stay on the sidelines for now, and wait and see how the precious metal trades following the pending rate hike. The company’s earnings have been falling and analysts forecast them to decline 23% in 2016 versus 2015. The stock is trying to build momentum, but I view the recent bounce more as a selling opportunity than a reason to buy new shares.


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Isle of Capri Casinos

Resort and casino operator Isle of Capri Casinos (ISLE) was upgraded on December 7 by Stifel Nicolaus to “buy” from “hold”, but the stock recently ran into trouble after a disappointing second-quarter report at the start of the month that drove shares sharply lower. While fiscal second-quarter earnings were in-line with the consensus estimate, revenues were weaker than expected, which led to a 15% drop in the stock on the day following the report. Even with the recent pull-back in the stock, its valuation remains a problem, with a P/E of 56.6. After such a steep drop in a stock, typically you see value hunters move in to pick up shares at a discount, but with a P/E of 56 that is unlikely to occur on ISLE. The stock more than doubled during the first half of the year, but the sharp increase in shares led to high expectations from investors, but the weaker than expected revenue numbers are likely to keep investors from buying back into the stock until the company next reports earnings on February 25.


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Barnes & Noble

Barnes & Noble (BKS) is a stock that I recently included in my “five stocks I hate” list, but not everyone hates the stock. BKS was upgraded on December 7 by Zacks Investment Research to “buy” from “hold”. The company faces stiff competition from other retailers of digital book downloads, and its traditional brick and mortar business has been struggling for years. The company’s recent quarterly results were weaker than expected on both the top and bottom line, and same-store sales fell 1% versus the same period last year. The company is struggling, and until it can start to post some upbeat quarterly numbers, I would avoid the stock.


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Big Lots

Discount retailer Big Lots (BIG) was upgraded on December 7 to “buy” from “hold” by analysts at ValuEngine. While the analysts see some value in the stock after a recent post-earnings sell off, I am not a believer in the stock at this point, and neither is research firm Piper Jaffray, which lowered its rating on the stock to “neutral” and lowered its price target from $61 to $43. The stock is now trading at $38.78, so the firm does seem some upside price potential, but the rating downgrade shows a clear erosion of faith in the company following its recent third-quarter report. Big Lots is working on boosting its online presence, which will hurt profitability in the short-term, and if the move does not prove successful, the company will find itself in big trouble. After the recent dip in the stock, its P/E is now slightly under 15, so I can understand why ValuEngine has taken a bullish stance on the stock, but with the company moving to a loss of one penny during the recent quarter from a profit of six cents during the same period last year, I would not buy into the stock until it proves its third-quarter loss was an anomaly and it shows a profit for the current quarter.


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Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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