Just like how “buy” ratings from Wall Street analysts can give you great ideas to add to your watchlist, “sell” ratings from these analysts can also steer you away from the stocks to avoid.
That said, much like how not every stock rated “buy” ends up being a profitable investment, not every stock rated “sell” ends up in the stock market graveyard. Sure, given sell-side analysts assign stocks rarely assign “sell” ratings. With this, you may be thinking “if analysts are rating this stock a sell, things must be pretty bad.”
However, sometimes analysts only rate a stock a “sell” just as the market is finishing up absorbing negative developments. Sometimes analysts overestimate the importance of valuation. Similar to individual investors, they overestimate the importance of both good and bad news about a particular stock.
So, what “sell”-rated stocks are truly stocks to avoid, and which are unfairly low-rated? Let’s take a look at seven stocks that have received either a downgrade or a bearish analyst rating since the start of the year, and find out.
Nordstrom (JWN)
Back in March, Jeffries’ Ashley Helgans downgraded Nordstrom (NYSE:JWN) shares from “buy” from “hold,” with a price target of $17 per share. In her downgrade, the analyst cited the prospect of a longer-than-expected recovery of the department store chain’s margins. Given this timeline, Helgans believes shares are fairly priced.
JWN stock has not received any other sell-side downgrades lately, but it hasn’t received much in the way of bullish coverage, either. Over the past year, two other analyst firms covering the stock have issued equivalent to “hold” ratings on shares.
That said, while the analyst community may be on the fence about Nordstrom, there may be a new catalyst emerging. The Nordstrom family is reportedly interested in taking the company private. While this takeover talk is still in the rumor stage, the company’s board has formed a committee to evaluate a possible take-private offer.
Netflix (NFLX)
Canaccord Genuity’s Maria Ripps downgraded Netflix (NASDAQ:NFLX) shares from “buy” to “hold,” following the streaming giant’s latest quarterly earnings release. She also reduced her price target from $720 to $585 per share.
According to the analyst, there’s little out there suggesting that revenue growth in the coming quarters will beat Netflix’s latest guidance, which fell short of Wall Street expectations. While two other analyst firms issued bullish ratings on NFLX stock post-earnings, you may want to take heed of Ripps’ on the fence view of shares, and consider it one of the stocks to avoid.
Netflix may appear reasonably-priced compared to other mega cap tech stocks, but its forward valuation of 30.7 represents a massive premium to most media stocks. After surging nearly 75% over the past year, further upside may be limited. Moreover, some “old media” rivals are making progress with their own streaming ventures.
ServiceNow (NOW)
Two weeks back, ahead of earnings, analysts at Guggenheim downgraded ServiceNow (NYSE:NOW) from “buy” to the equivalent of “hold.” The sell-side firm did not assign a price target for the enterprise software firm’s shares.
A key reason behind the downgrade was valuation. Guggenheim believes that shares has limited upside, given NOW’s current valuation relative to near-term prospects. Much like the aforementioned NFLX stock downgrade, other analysts have been more bearish than bullish on NOW stock.
However, despite the post-earnings bullishness from the analyst community, a look at the latest numbers and outlook arguably gives more credence to Guggenheim’s less-than-bullish view. Last quarter’s results failed to wow the market, and the updates to outlook came in short of prior expectations. As NOW continues to trade at a rich forward multiple (53.6), downside risk could be substantial. For now, staying away is possibly your best course of action.
Philip Morris (PM)
Philip Morris (NYSE:PM) is another recent recipient of an analyst downgrade, but it may be up for debate whether it is truly one of the stocks to avoid. In March, analysts at Argus Research downgraded the tobacco company’s shares.
Moving PM stock from “buy” to “hold,” the Argus analysts cited declining tobacco usage and regulatory risks in their downgrade. Since this downgrade, however, shares in the company, which sells Marlboro cigarettes outside the U.S., and alternative cigarette/nicotine products in the U.S., has performed well.
Most notably, following Philip Morris International’s latest quarterly earnings release. In large part, thanks to strong growth with its non-cigarette product offerings. Reasonably-priced at 15.1 times forward earnings, and a nearly 5.5% forward dividend yield to boot, you may want to skip taking heed of Argus’ mixed view of PM shares, and buy on the recent promising news.
Spirit Airlines (SAVE)
Given Spirit Airlines (NYSE:SAVE) crash landing when a planned merger with JetBlue (NASDAQ:JBLU) was grounded by a court ruling, I’m doubtful many investors are interested in hopping aboard this low-cost air carrier play.
However, if you’ve been mulling whether to go contrarian on SAVE stock, you may want to keep in mind the rationale behind Citigroup’s downgrade of Spirit from the equivalent of “neutral” to “sell,” when a Federal court ruled that the proposed deal violated antitrust law.
Besides citing the court ruling would lead to a deal cancellation (which it did), the Citi analyst team also noted slim chances of another bidder emerging. To make matters worse, the analysts also argued that the carrier would likely continue to report negative EBITDA until 2025. As Spirit contends with high debt and negative cash flow, it’s best to stay on standby with SAVE shares.
Upstart Holdings (UPST)
In past coverage of Upstart Holdings (NASDAQ:UPST) I’ve called it one of the top stocks to avoid. Mostly, due to the fact that shares trade at a high multiple of forecasted 2025 results. This rich valuation contrasts with the latest guidance for this provider of AI-powered credit underwriting analysis.
I’m of course not the only one bearish on UPST stock. The short side of this trade remains very crowded. 34.1% of Upstart’s outstanding float remains sold short. Also, earlier this month, analysts at BofA issued the equivalent of a “sell” rating on UPST shares.
In this bearish analyst rating, BofA cited multiple concerns, including the sustainability of its funding model, which has increasingly entailed putting its own capital at risk. While giving UPST a $22 per share price target, taking into account the rich valuation and risks, it may safer to assume downside risk is much, much higher.
Walgreens Boots Alliance (WBA)
Shares in pharmacy chain Walgreen Boots Alliance (NASDAQ:WBA) have been in a slump for years. Even so, with shares in this Dow Jones component trading for only 5.5 times forward earnings, and sporting a 5.65% forward dividend yield, some may be deciding to buy it as a “Dogs of the Dow” play.
The fact that WBA stock has become a turnaround play may also be piquing the interest of bottom-fishing investors. Yet while WBA may seem like it’s bottomed out, rather than being deep value, consider it better to assume Walgreens Boots Alliance remains a value trap.
Don’t just take my word for it. Back in February, analysts at HSBC downgraded WBA from “hold” to the equivalent to “sell,” giving shares a $17 price target. In the downgrade, the analysts cited structural challenges that may limit the extent in which turnaround efforts improve fiscal results.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.