An analyst’s upgrade almost always causes a stock to trend higher. However, those gains can often be a value-trap. In this piece, I am looking at three such stocks; those that I believe are presenting a value trap to investors.
Avoid the Large Buyout Rumors
Warner Chilcott Plc (NASDAQ:WCRX) saw a slew of upgrades from firms Morgan Stanley, UBS, and CRT Capital, all of whom are buying the idea of a merger with Actavis. According to these firms, the average buyout price for WCRX is $23, yet Buckingham believes the deal could see a stock upwards of $30. In the last two days shares of Warner Chilcott Plc (NASDAQ:WCRX) has rallied more than 25%, thus making a $23 buyout price a premium of more than 50% from its May 9 close (when the deal was first reported).
Warner Chilcott Plc (NASDAQ:WCRX) has zero growth, has lost numerous drugs to generics, and has a debt-to-assets ratio that continues to rise by the quarter. Warner Chilcott Plc (NASDAQ:WCRX) was reportedly in the buyout market last year, and Actavis is the first company to show significant interest. Therefore, Warner Chilcott Plc (NASDAQ:WCRX) doesn’t really have any leverage. Now, I’m not suggesting that the merger won’t expand Actavis’ sales team, its presence, and expand its IP portfolio and pipeline, but it’s not worth a 50% premium to last Thursday’s close. In my opinion, I’d be careful, and would assume that most upside is priced into the stock. I would not buy on these upgrades.
A Great Company, But Not Deeply Valued
The Boeing Company (NYSE:BA) has seen massive YTD gains of more than 25% (after a flat year in 2012) despite a very public safety issue with its new Dreamliner. Much of its rally has been fundamental, but some has been induced by analysts who cover the stock. On Monday, Sterne Agee issued yet another bullish outlook, raising the stock’s price target from $100 to $120 due to its expectations of $18 billion in free cash flow over the next three years. Furthermore, the firm explains its $120 price target by saying that it expects The Boeing Company (NYSE:BA) to trade near the top of its historic range of 10-12 times free cash flow.
While these metrics may be correct, I am more concerned with the company’s metrics compared to the S&P 500 relative to economic growth (also called the 10-10-10 strategy detailed in my book). When I look at Boeing from this perspective, I don’t see a company that is incredibly cheap relative to the market. In fact, it is near fair value with a P/E ratio over 16 that is equal to the S&P 500, thus I don’t see the great value or discount suggested by Sterne Agee.
Need to See Margin Improvements Before Buying Into Hype
Sequenom, Inc. (NASDAQ:SQNM) has rallied 25% in the last five sessions following better-than-expected earnings and a bullish upgrade from Credit Suisse. According to the firm, risks stemming from its five-year agreement with Blue Cross and Blue Shield for the MaterniT21 PLUS test have diminished. The expectations for full-year tests have been erratic yet have recently settled around an estimated 150,000. However, after strong earnings, Credit Suisse is anticipating test sales of 175,000.