It’s never wise to buy on the recommendation of one analyst alone, but you can use the reasons for the call to help make a more informed investment decision. With that said, there were some controversial calls on Monday, but are these analysts right, or does the call create a trap for retail investors?
The upgrades continue to pour in
Facebook Inc (NASDAQ:FB) is no stranger to high-profile upgrades following its perception-changing Q2 earnings beat. In the quarter, revenue accelerated from a growth rate of under 40% year-over-year to over 50%. Immediately, due to my feelings that Q2 changed the outlook for the company, I gave it a $50 price target, and was instantly criticized on Twitter.
However, on Monday, the stock hit new 52-week highs after Gene Munster from Piper raised his target from $38 to $46 citing new ad products. Specifically, Munster likes the prospects of new video ads — a service that could more than double Facebook’s current revenue.
Personally, I love this call. At $46, Facebook Inc (NASDAQ:FB) would trade at 18.3 times sales, which would still be significantly less than LinkedIn’s 21 times sales valuation. In my opinion, the long-term outlook for Facebook Inc (NASDAQ:FB) is brightening, with over one million advertisers using the service, and I think Facebook Inc (NASDAQ:FB) is a “Buy.”
A side of caution
Priceline.com Inc (NASDAQ:PCLN) ticked higher by 2% on Monday with its price target being hiked 25% to $1,040 by JPMorgan. The firm simply notes expectations for a solid Q2 and more market share gains stemming from its Kayak acquisition.
Priceline.com Inc (NASDAQ:PCLN) could very well have a good Q2 and could gain more market share from its competitors. However, as I explain in this article, Priceline is becoming a bit of a valuation concern to me. This is a company that operates with perfection on every level, with an industry best 42% return on equity and 35% operating margin. Priceline.com Inc (NASDAQ:PCLN)’s closest competitor, Expedia, is not even close in terms of efficient investments and margins.
Nonetheless, Priceline.com Inc (NASDAQ:PCLN)’s greatest strengths could become a weakness when trading at 8.25 times sales. Priceline already controls 20% of the entire travel industry, and I am concerned that the company can not grow aggressively without sacrificing margins and its return on investments. Therefore, Priceline.com Inc (NASDAQ:PCLN) might reach $1,040, but I’d definitely view this call on the side of caution.
Too late of a call?
Canadian Solar Inc. (NASDAQ:CSIQ) has produced a one-year 500% gain, yet, Roth is calling for more upside by initiating shares with a “Buy” rating. The firm’s call comes behind the company’s deal to sell five utility-scale solar power plants for $277 million to Concord Green Energy.
The deal strengthens the company’s balance sheet and will allow it to lower its debt-to-assets ratio of 50%. Canadian Solar Inc. (NASDAQ:CSIQ), like other solar companies, had a rough year in 2012 with falling revenue and margins. However, 2013 has produced stability and a boost in margins, which has sparked gains for the stock.
With a market cap of $670 million, Canadian Solar Inc. (NASDAQ:CSIQ) is still cheap at just 0.5 times sales. The company still has a large portfolio of assets that it can divest to become more efficient. As of now, investors appear to like what they see, and I agree that this sell was a good deal for Canadian Solar Inc. (NASDAQ:CSIQ). However with gains of 500% this year, and in a very fragile solar space, I think a “Buy” rating might be a bit too bullish. At this point, it looks as though much of the company’s upside is priced into the stock.
In my opinion, Gene Munster is making a great call with Facebook Inc (NASDAQ:FB). While $46 might appear pricey, it would still be a discount to other high-profile internet companies such as LinkedIn, Yelp, and Zillow.
In the case of Priceline and Canadian Solar Inc. (NASDAQ:CSIQ), analysts are calling for a continued trend higher. But with Facebook, we are seeing a shift in the trend, which can produce very large gains. Therefore, I view Munster’s upgrade as the best of the day.
Brian Nichols owns shares of Facebook. The Motley Fool recommends Facebook and Priceline.com. The Motley Fool owns shares of Facebook and Priceline.com.
The article Should You Act On These 3 Controversial Upgrades? originally appeared on Fool.com and is written by Brian Nichols.
Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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