3 May 1st Upgrades Investors Should Be Cautious About

Includes: ANF, CAVM, TRGP
by: Matt Schilling

These three companies were making waves on May 1st especially since several analysts changed their status ratings. That being said, this article will take a better look at those companies and reasons behind the changes.

Abercrombie & Fitch (NYSE:ANF) - Both Citi and UBS had very positive things to say in regards to Abercrombie & Fitch on May 1st. These comments triggered UBS to raise its rating on ANF from Neutral to Buy.

Analysis: The price target raise by UBS from $51 to $66 is pretty impressive and I think that there are a few factors Investors should consider before acquiring a large position in ANF. Europe is going to be one of Abercrombie's focal points, and stabilization is necessary. U.S. sales also need to improve, and when ANF reports earnings on May 16th EPS needs to beat estimates by at least $0.04/share, which it has the ability to do, however slowing retail sales concern me.

Cavium Networks (NASDAQ:CAVM) - Research Firm Mizuho upgraded Cavium from Neutral to Buy, citing the potential for a very good adjusted quarter from the San Jose, California, based Semiconductor company. It also increased its price target on the stock from $30 to $35.

Analysis: On April 3rd Cavium cut its first-quarter outlook, noting that sales may come in much weaker than the street had expected in two key markets. The damage wasn't as bad as it seemed when it reported earnings after the bell on May 1. Analysts were expecting the company to earn $0.01/share, when it actually came in at $0.02/share surprising the street by 100%. That being said, CAVM has very good upside potential, however recent guidance by the company may raise a red flag. Even though the company showed a non-GAAP profit, the company reported a loss of -$0.28/share, which was much wider than the street was looking for, and in turn sent the stock down in after hours.

The upgrade and price target change may be preemptive as guidance isn't as strong as some investors would have hoped for. Acquiring a position comes with caution, and if I were to invest I'd be acquiring small positions, as any wrong move could send the stock tumbling.

Targa Resources (NYSE:TRGP) - The analysts at Robert W. Baird raised their rating on the Houston, Texas-based Targa Resources from Neutral to Outperform, and increased price targets from $47 to $60 a share.

Analysis: Targa Resources is a leading provider of midstream natural gas and natural gas liquid in the U.S. Currently trading at a P/E ratio of 65.51 and yielding 3.1%, TRGP isn't exactly cheap by most standards. The company is set to report quarterly earnings on May 3, and analysts are expecting the company to $0.27/share on $2.08 billion in revenue. There are two things investors should consider before acquiring a position in TRGP. First, three out of the last four quarters have demonstrated significant EPS misses, with the only bright spot coming in the June 2011, when they beat by $0.05/share. Second, natural gas prices are some of the most volatile commodity prices in the market, and the March 2012 quarter wasn't any exception and therefore an earnings shortfall could be on the horizon.

The yield is very attractive, however the earnings track record isn't and therefore I'd build my position bit by bit. If you feel like taking a short-term risk then by all means buy ahead of the earnings report. If you don't and the earnings miss, then you can probably get your shares at a discount to what they are currently trading at.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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