In this article I look at five stocks that analysts are becoming increasingly pessimistic about. While Hartford Financial (HIG), J.C. Penney (JCP), Juniper Networks (JNPR) and Wendy's (WEN) are receiving true downgrades, Devry (DV) merely had its price target and earnings estimates adjusted.
Morgan Stanley reduced both its price target and earnings estimates for Devry. The new price target is $48, although the firm kept its Overweight rating on the stock. As for news, Devry just reported earnings. Those were a mess though - the company missed earnings per share expectations by 9 cents. The core issue is that new financial aid standards from the Department of Education have thrown a wrench into Devry's business model. Enrollment is falling fast: undergraduate enrollment fell 13% in the few months after new standards were implemented. Meanwhile, the number of new enrollees declined a whopping 25%. Business and technology programs fared the worst. While Devry isn't as overvalued as comparable stocks like Apollo Group (APOL) and Education Management (EDMC), I believe this stock will decline further. Investors can expect additional regulations that will put an even greater strain on for-profit universities such as Devry, including a new regulation coming in July 2012 that states a company's education program would be considered to " lead to gainful employment" only if it meets certain metrics. Domestically, DeVry and other operators could suffer as failure to comply with the new requirements would likely render an institution ineligible for federal student loan aid. The only bright spot for this company is its International, K-12 and Professional Education division. Within that unit, Becker Professional Education provides services that truly add value without any fear of regulation.
JPMorgan downgraded Hartford Financial from Overweight to Neutral, and the new price target is $22. As for news, Hartford Financial shares have reacted negatively to the latest announcement from the Federal Reserve. The federal government plans to keep interest rates low for at least another couple of years, which will continue to put pressure on Hartford Financial's profits. I'm also concerned about some of the things on Hartford Financial's statement of cash flows. The insurance company had nearly $3 billion of financing outflows during 2010, and operating inflows for fiscal year 2011 have been muted at only $1.624 billion. Compared to similar companies, I prefer MetLife (MET), which offers investors lower price to earnings and price/earnings to growth ratios. MetLife also boasts superior margins - those numbers are 36.62% gross and 13.23% operating. Investors should note that Hartford Financial is a very well run company - it's just that insurance is a tough industry right now and a cheaper stock is available. In fact, I do like Hartford Financial's sales of Hartford Life Private Placement, Federal Trust Corporation and Trumbull Services, all of which were truly non-core assets. Also, Hartford Financial does have a dividend yield of 2.20%, but it will be probably be years before the company can afford another dividend increase.
BMO Capital downgraded J.C. Penney from Market Perform to Underperform, and the new price target is $29. BMO Capital wasn't thrilled with J.C. Penney's turnaround plan, which figures to shake up the company. For instance, the company will now have 12 sales events per year and only three types of prices. Seasonal items like back-to-school products will be discounted, and two Fridays every month will have a special promotion. J.C. Penney hopes to improve business with these simplifications, but cutting costs also is a significant goal. Store layout will also be changed as seen by this quote from CEO Ron Johnson: "In an Internet age where you can have exactly what you want with one keyword, people won't tolerate big stores. You have to break it down for them." J.C. Penney was also extremely optimistic about its 2012 profits. The company is expecting earnings per share of $2.16 despite analyst estimates of only $1.65 per share. That sent the stock skyrocketing, and the stock is now definitely overvalued. The price to earnings ratio of 45.27 and price/earnings to growth ratio of 2.19 are ludicrous compared to Kohl's (KSS) and Macy's (M). I believe that J.C. Penney will be much better off now that Ron Johnson is CEO, but it's unlikely that the current stock price of over $41 can stay that high.
Stifel Nicolaus and Morgan Keegan both downgraded Juniper Networks. Both firms now have a Hold or Hold-equivalent rating on the stock, and Morgan Keegan's price target is $20. As for news, Juniper Networks just reported earnings. The company's revenue and predictions for first quarter earnings per share were both lower than analyst expectations, which sent the stock plummeting. Fourth quarter earnings per share were in line with projections, however, and the revenue miss was admittedly quite small. On the other hand, I can't really justify paying Juniper's current price of ~$22. With a price to earnings ratio of 22.86 and price to sales ratio of 2.60, this stock is simply undervalued. Cheaper stocks include Alcatel-Lucent (ALU) and Cisco Systems (CSCO). I expect Juniper Networks to be negatively affected by future macroeconomic trends, which limits how much I would be willing to pay for this stock. As mentioned in the earnings transcript, Tier 1 service providers and financial institutions are reducing their spending. Furthermore, the company is losing at least some market share to Cisco in certain networking products. At a price to earnings ratio of 16.89, I find Cisco to be much more attractive. Cisco is also returning value to shareholders by yielding a dividend of 1.20%.
UBS downgraded Wendy's from Buy to Neutral, and the new price target is $5.50. As discussed here, Wendy's is currently experiencing a number of interesting problems. The company released its W burger too soon after the Dave's Hot 'N Juicy burger came out, which caused customers to split their interest in Wendy's between two different burgers. I would've liked to see the W burger come out months from now once interest in the Dave's Hot 'N Juicy burger died down. Even worse, the W burger sells for less than the Dave's Hot 'N Juicy burger, so customers interested in trying a new burger would naturally choose the cheaper, lower-margin product.
While Wendy's was wise to sell Arby's back in July, some of the decisions this management has made are perplexing. Specifically, I do not think efforts to remodel Wendy's stores will be worthwhile because consumers patronize the company for its burgers and fries rather than ambiance. Increased focus on improving and advertising beef purity and its products would be more logical. I recommend investors put their fast-food investment money in a high-quality stock like McDonald's (MCD) or Yum Brands (YUM). In fact, both of those stocks offer lower price/earnings to growth ratios than Wendy's, which is also nice to see. For the dividend investors out there, McDonald's is the dividend king of these three stocks, with its dividend yield of 2.80%. Although McDonald's had slightly pessimistic comments about 2012's prospects, I wouldn't be surprised if McDonald's increases its dividend later in the year.