Review Of Analyst Downgrades This Week - Part VII

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Includes: AVP, BAC, C, FE, GS, JPM, XL
by: The Value Investor

Analysts have been sending out their research reports to their clients again this week. The following is a review of the most important downgrades for the week of May 21 till May 25.

FirstEnergy

Jefferies lowered its advice for FirstEnergy (NYSE:FE) from hold to underperform with a $40 price target. The broker sees some 15% downside potential for the utility holding company amidst increased regulatory risk in New Jersey and Ohio. Shares have moved up 6% so far this year after the company reaffirmed its 2012 and 2013 earnings guidance.

Avon Products

UBS lowered its advice for Avon Products (NYSE:AVP) from neutral to sell with a $13 price target. The Suisse based bank remains cautious after the recent sell-off. Shares in the direct seller of beauty products have seen a rocky ride so far this year. Shares jumped over $3 in a single session to $22 a share after Coty made a $10.7 billion offer for the company. After Coty withdrew its offer and the reality of dramatic operational performance kicked in shares fell to $17 at the moment, sending shares down 5% year to date.

Banking Sector

Smaller player JMP securities send an aggressive sell recommendation for the entire banking sector. It sets an underperform rating for major banks including Bank of America (NYSE:BAC) with a $5.50 price target, Citigroup (NYSE:C) with a $23 target, Goldman Sachs (NYSE:GS) with a $77 target and JP Morgan (NYSE:JPM) with a $28 target. JMP thinks that banks will see their earnings and share prices fall further on the growing crisis in Europe. Furthermore the recent trading losses at JP Morgan will most likely lead to a stricter implementation of the Volcker rule and leave Washington divided on its stance towards the sector. All in all, the sector faces multiple headwinds according to analysts.

XL Group

Goldman Sachs lowered its advice for XL Group (NYSE:XL) from neutral to sell accompanied by a $21 price target. Margin improvements at the firm will lag that of its peers according to the bank. The heavy professional liability book and hiring spree last year make margin expansion difficult despite moderate improvements in pricing. Shares in the global insurance and reinsurance company trade virtually unchanged so far year to date.

Conclusion

As is well known, analysts research reports tend to be heavily biased towards the buy side. This makes any sell side research much more interesting as banks do not have to please their corporate customers in order to win investment banking deals. Unfortunately some of the recommendations come after the fact (often after an earnings release). The warning of JPM Securities for the banking sector took many by surprise and came after stocks have seen some serious corrections already. Most bank stocks trade around flat for the year after posting 40-50% gains year to date by March and April.

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