In an age of analytics, analyst reports are sort of like a baseball player’s slash line. Knowing about stock upgrades and stock downgrades is an essential part of your research, but ultimately, they only tell you so much. That’s particularly true in volatile times such as investors have been living through for the last four years.
In 2024, that volatility is centered, in part, around interest rates. The year started out with the market pricing in six or more interest rate cuts. But with inflation beginning to heat up, investors aren’t sure how many will come, or if any will come.
That could have a big impact on analyst sentiment later in the year. It’s also why investors should be careful not to assign too much significance to three recent stock downgrades. The stocks on this list didn’t just receive downgrades from Buy to Hold but with a higher price target. These stocks were downgraded to Underweight or Sell by at least one analyst in the last month. And each has a consensus price target that suggests trouble ahead in 2024.
But as the headline of this article suggests, each stock gives investors a reason to believe that the forecast could be wrong. If that’s true, you’ll want to ensure you’re not on the wrong side of these stock downgrades.
Carvana (CVNA)
Carvana (NYSE:CVNA) received a downgrade from Raymond James on February 16, 2024. That matches the consensus price target of $38.17 which is 27% lower than the CVNA stock closing price on February 16, 2024. Plus, six out of 23 analysts have a Strong Sell rating on the stock.
It makes sense. The latest readings on inflation have put an end to investors’ hopes for a March rate cut. Now in addition to wondering when rate cuts may happen, there’s rumblings that there could be another hike before rates come down.
From a technical standpoint, Carvana stock is up 361% in the last 12 months even as revenue has been declining. The reason would seem to be improving margins that have caused earnings to be higher year-over-year.
But higher doesn’t mean positive and last quarter was the first quarter in the last nine quarters that Carvana posted positive earnings. And the company is forecasting negative earnings over the next 12 months.
Having said all of that, the bullish case for Carvana comes down to interest rates. Economists still believe the Fed may cut rates in June. Any cut in interest rates would be psychologically important to consumers. And with short interest in CVNA stock up at 40%, I wouldn’t want to be on that side of the trade if things reversed.
As someone who prefers to take long positions, Carvana isn’t particularly appealing to me. But, if you’re a nimble trader, CVNA stock is one you’ll want to watch closely.
Corning (GLW)
Corning (NYSE:GLW) is next on this list of stock downgrades. GLW stock got downgraded by HBLC Holdings from Hold to Reduce on February 1, 2024. To be fair, that’s the only Strong Sell on Corning. However, several other analysts have lowered their price targets for the stock.
The reason for any negative analyst sentiment would seem to be expectations for the economy to significantly weaken in 2024. However, Corning is expected to be a recipient of some of the $42.5 billion that is set aside in the Broadband Equity, Access, and Deployment (BEAD) program. This program is part of the U.S. government’s bipartisan infrastructure act. And part of Corning’s portfolio includes its SpiderCloud small cell Enterprise Radio Access Network (E-RAN) specifically to capture the 5G opportunity.
But when the government reconvenes in late February, it will have only a few days to pass a budget. And with so much rancor, a government shutdown wouldn’t be shocking. But it’s also an election year, and neither side will want to face their constituents when dollars from programs such as the BEAD program are not working their way into communities.
Therefore, it seems more likely that Corning may be right in their assessment that demand will normalize. That will cause more investors to pay attention to positive news such as the 15% earnings growth and a strong dividend.
Dollar General (DG)
On February 6, 2024, Dollar General (NYSE:DG) was lowered from a Hold to a Sell by StockNews.com. The stock continues to be weighed down by negative sentiment due to declining earnings. However, with the stock down over 37% in the last 12 months, the sell-off seems overdone.
If interest rates continue higher for longer, it would seem the worst has already been priced into DG stock. The company targets low- to middle-income consumers who are looking for relief from inflation. The company’s top-line results suggest those consumers are spending even with higher interest rates.
And if interest rates do get cut, that may give these consumers a bit more purchasing power. It’s a win-win for Dollar General, but one that the analysts, at this time, are not buying. But you should. DG stock trades at just 18x forward earnings and it pays a respectable dividend with a yield of 1.7%.
On the date of publication, Chris Markoch did not have (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.