By Larry Gellar
Checking out recent analyst ratings can be a good way to make sure you’re not buying a dud. With that in mind, here are 5 stocks that analysts are saying to stay away from:
Last week, Credit Suisse reduced earning estimates for Citigroup (NYSE:C) due to worries about the macroeconomy. The target price was also lowered to $45. Citigroup has been up though, and the company is doing well with its credit cards. In fact, credit card delinquency decreased in September, whereas other big banks have struggled in this category. Defaults are also decreasing at Citigroup, although this and the credit card delinquency could simply be a statistical anomaly.
Future data will be important to see if Citigroup can keep up this trend and whether the banking industry can become profitable again. Speaking of profits, earnings season is underway and the first big financials to report are Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS). Bank of America turned in a decent profit, although this was boosted by a variety of factors that probably won’t keep happening. Goldman Sachs showed a loss, on the other hand, although many investors were happy with many parts of the earnings report regardless.
Citigroup also competes with HSBC (HBC) and JPMorgan Chase (NYSE:JPM). Citigroup is in the middle of those stocks for ratios like price to earnings, price/earnings to growth, and price to sales. Operating margin for Citigroup is only 20.4%, however.
BMO Capital downgraded IBM (NYSE:IBM) from Outperform to Market Perform due to lower than expected revenue. The price target is now $190, although it’s worth mentioning that a couple of firms have actually increased their earnings estimates for IBM. Regardless, the market has reacted quite negatively to IBM’s earnings report.
Geographically, Japan may be IBM’s weakest market, and the company’s business with the government is also struggling. Part of this can be attributed to decreased public spending, although many investors have been a bit surprised regardless. Changes in exchange rates are another factor affecting IBM negatively, and expectations for future had to be reduced because of this. IBM’s predictions for operating earnings were revised slightly upward, however.
Additionally, many shareholders like IBM’s strategy for the emerging markets, which essentially involves getting to key locations before other companies do. Important competitors include Accenture (NYSE:ACN), Hewlett-Packard (NYSE:HPQ), and Microsoft (NASDAQ:MSFT). Ratios for IBM like price to earnings, price/earnings to growth, and price to sales are all a bit above average, although that’s certainly reasonable for an industry leader.
In other news, IBM will be providing Cherry Central with some special technology. Here’s what Andy Monshaw, one of IBM’s general managers, had to say:
We are collaborating with Cherry Central in an effort to bring a small to midsize business at the forefront of innovation to improve its ability to quickly trace tainted food through a more transparent food supply chain, ultimately ensuring the safety of consumers.
Societe Generale is rating Qualcomm (NASDAQ:QCOM) as a Hold with a $55.50 price target, although the firm notes that Qualcomm is beginning to see more competition. Qualcomm has traded about flat since then, although good news is coming out of India. Specifically, India’s telecommunications secretary has announced that Qualcomm won a key license that will allow it to run Internet services. This is the same license that Qualcomm was previously rejected for due to a supposedly missed deadline as well as other technicalities. While this news wasn’t particularly unexpected, investors should certainly be excited.
Additionally, the company will be reporting earnings its fourth-quarter earnings on November 2nd when the market closes. This figures to be a pivotal earnings release, so shareholders will certainly want to keep an eye on that. Important competitors for Qualcomm include Broadcom (BRCM), Nokia (NYSE:NOK), and Texas Instruments (NYSE:TXN). Those stocks are cheaper using price to earnings and price to sales ratios, although Qualcomm has a pretty low price/earnings to growth ratio.
Additionally, margins are great, with gross margin at 67.5% and operating margin at 32.27%. As for cash flows, $830 million came in during fiscal year 2010 and $2.199 billion came in during the 9 months after that.
Last week, Jeffries downgraded VMWare (NYSE:VMW) from Buy to Hold as the company could begin to see reduced business. Price target is $90, although it’s worth mentioning that Goldman Sachs actually has this stock on its Conviction Buy List. Meanwhile, VMWare has been up big since it reported earnings. In fact, the company’s third-quarter net income doubled those same results from last year. Software that allows companies to use multiple systems on one computer is what’s really driving the growth.
Geographically, business in Asia is doing great, and government spending from the United States has also helped the company. Revenue for next quarter is also expected to be very strong, although the quarter after that could see a bit of a decrease according to VMWare’s execs. Additionally, here’s a good quote from Mark Shavlik, one of the company’s vice presidents:
We continue to innovate to bring [small and midsize businesses] advanced solutions tailored to their needs so that they can increase efficiency and reduce costs regardless of the size or sophistication of their IT organization.
Important competitors for VMWare include Citrix (NASDAQ:CTXS) and Microsoft (MSFT). Note that those stocks trading at much lower ratios for price to earnings, price/earnings to growth, and price to sales.
Jeffries downgraded Walgreen (WAG) from Buy to Hold due to increasing pressure from pharmacy benefit managers. In fact, Scott Mushkin surveyed health plan sponsors to see how they would react if Walgreen loses it battle with Express Scripts (NASDAQ:ESRX). The results weren’t very good, with many saying that they wouldn’t go out of the way to accommodate Walgreen.
With that in mind, price target was set at $36, only a bit higher than what Walgreen’s currently trading for. It’s also worth noting that Mushkin lowered his earnings estimates for 2012 and 2013. On the other hand, good news for Walgreen is coming out of Kansas City, where a special agreement with Express Scripts has been reached.
What this means for the rest of the country remains to be seen, especially since this appears to be a unique win-win situation. In fact, Express Scripts won’t even agree to a special proposal from Walgreen regarding the Tricare program. That plan involves workers for the Department of Defense, and Walgreen has guaranteed that its prices would be the same or lower than other pharmacies that Tricare works with. Other important drug stores include CVS Caremark (NYSE:CVS), Rite Aid (NYSE:RAD), and Wal-Mart (NYSE:WMT). Walgren has the lowest price to earnings ratio and, with the exception of Rite Aid, the lowest price to sales ratio. Additionally, Walgreen margins have been pretty solid, with gross margin at 28.39% and operating margin at 5.45%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.