Speculating on companies whose ratings have been recently changed by analysts can be a good short-term strategy. Normally, companies will see increases in their prices after these changes. The ratings are updated daily and can therefore change daily. They can change because of a change in the analyst's estimate of the stock's fair value, a change in the analyst's assessment of a company's business risk, or a combination of any of these factors.
I assessed companies which were upgraded on October 3, and I chose the two companies with a change in ratings to consider.
The companies with significant changes are:
Thoratec Corporation (THOR) changed rating from neutral to buy.
Assurant Inc (AIZ) changed rating from neutral to buy.
An upgrade generally tends to increase the price while a downgrade does the opposite. However, it is not only the change but the reason for the change that is important to understand. I have chosen these two companies because the analysts have commented on the reasons why they have changed the ratings which let me do a better analysis.
These two stocks are valued for the change from sell, hold, market perform or neutral to buy or strong buy. It is considered a very significant change because ratings had remained static for a long time. This change has to strongly favor the valuation of the companies mentioned above as well as the vision of future investors. Normally, these changes for the better are due to lower debt and improvement of the companies' cash. These are two keys to perform a follow-up or think in any purchase of these stocks.
Here is a look at the two stocks:
Thoratec Corporation engages in the development, manufacture, and marketing of proprietary medical devices used for circulatory support. The companys primary product lines include ventricular assist devices, such as HeartMate II, an implantable left ventricular assist device consisting of a rotary blood pump to provide intermediate and long-term mechanical circulatory support; and HeartMate XVE, an implantable and pulsatile left ventricular assist device for intermediate and longer-term MCS.
Thoratec Corporation has a market cap of $2.11 Billion and an enterprise value of $1.84 Billion. Its trailing P/E is 26.53, and its forward P/E is just 20.24. Thoratec's estimated growth rate for this year is 21.29%. It has a total cash position on its balance sheet of just $268.83 Million, and its total debt is at 0. So, its total debt/equity is just 0.
UBS upgraded Thoratec Corporation from Neutral to Buy with a price target of $39.00 (from $35.00).
Analyst at UBS, Rajeev Jashnani, said:
While growth will likely be dampened over the next few yrs due to competition, valuation already reflects a downside case, in our view. Results from our LVAD survey leave us more confident in THOR's share position as well as ability to grow through the HVAD launch. As shares have been range-bound over the past 2 years (despite cumulative rev/EPS growth of 27%/ 43%), we believe that simply achieving Street ests should facilitate multiple expansion. Our 2013 revs/EPS ests for THOR are $499M/$1.80 vs. Street's $495M/$1.77. If we assume 40% HVAD share, resulting revs/EPS are $482M/$1.68. While upside in the stock may not be realized should this scenario play out, we believe THOR shares are still fairly inexpensive on these estimates, helping to limit down side (THOR could buffer EPS with more share repo).
My Rating and Technical Analysis
Left ventricular assist devices (LVADs) aid blood circulation of heart failure patients. HeartWare's HVAD was approved in Europe in 2009 as a bridge-to-transplant (BTT) therapy: it is used to keep patients alive until a heart transplant becomes available. Thoratec's device, called the HeartMate II, was CE marked in Europe as BTT in 2005, followed by U.S. approval three years later. This wider availability has seen Thoratec secure 78% of the worldwide LVAD market, according to analysts at Bank of America Merrill Lynch. UBS analysts appreciate the possibilities of growth and expansion of the launch of HVAD. The most important risk on this stock is that HVAD sales are not as expected causing an increase in manufacture costs.
From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock plunged from its May high of $37 to a recent low in June of $29.75. If you are bullish on this stock, I would look to be a buyer on the next high-volume move above some near-term overhead resistance at $36.76 a share. Look for volume that's tracking in close to or above its three-month average action of 422,545 shares.
Assurant Inc., through its subsidiaries, provides specialized insurance products and related services in the North America and internationally. It operates in four segments: Assurant Solutions, Assurant Specialty Property, Assurant Health, and Assurant Employee Benefits. The Assurant Solutions segment offers extended service contracts and warranties that provide coverage on cellular phones, personal computers, consumer electronics, appliances, automobiles, and recreational vehicles against mechanical breakdowns, accidental damages, and casualty losses.
Assurant Inc has a market cap of $3.14 Billion and an enterprise value of $2.51 Billion. Its trailing P/E is 8.28, and its forward P/E is just 6.64. Assurant's estimated growth rate for this year is 120.50%. It has a total cash position on its balance sheet of just $1.61 Billion, and its total debt is at $1.07 Billion. So, its total debt/equity is just 21.20.
Goldman Sachs upgraded Assurant from Neutral to Buy with a price target of $45.00 (from $43.00).
Analyst at Goldman Sachs, said:
We see attractive Risk (-6%)/ Reward(+21%) as recent data points and our detailed analysis of loss experience by state implies that premium rate changes will not be nationalized and the total change will be less severe than the market expects.
My Rating and Technical Analysis
Goldman Sachs expects investors to focus robust FCF and its proven track record of aggressively buying back stock. The most important risk is that the company's quarter revenues do not have the market's expected increase.
From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock plunged from its May high of $44.54 to a recent low in June of $32.41. After hitting that low, the stock bounced to its current price of $38.01. If you are bullish on this stock, I would look to be a buyer on the next high-volume move above some near-term overhead resistance at $39.04 a share. Look for volume that's tracking in close to or above its three-month average action of 865,730 shares.
*Chart data sourced from finviz.com, all other data sourced from yahoo.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.