On Monday we saw a handful of companies trade lower after analyst downgrades. Let’s see whether any of them are truly worth selling.
M&A Chatter Pushes This Railroad Too High
Stifel Nicolaus made a bold call on Monday, downgrading Kansas City Southern (NYSE:KSU) to “Sell” after a 40% 2013 rally. The firm specifically notes that its rally was due to M&A speculation, and that now the company’s valuation is too high.
Kansas City Southern (NYSE:KSU) is trading at 5.75 times sales with a P/E ratio of 31.50, and it posted revenue growth of just 1% during its last quarter. Compared to the S&P 500 and its P/E ratio of 19, Kansas City Southern (NYSE:KSU) does appear a bit pricey. After all, this is a railroad company, not a technology stock — yet it’s trading at metrics greater than Google’s, while the overall railroad industry trades at a valuation relative to the market. Therefore, I would have to agree that Kansas City Southern (NYSE:KSU) is a “Sell”.
Jefferies Expecting A “Bumpy Ride” From this Retail Company
Jefferies’ downgrade of Bed Bath & Beyond Inc. (NASDAQ:BBBY) wasn’t quite as harsh as Stifel’s, yet the reason was the same: valuation. Jefferies downgraded Bed Bath & Beyond Inc. (NASDAQ:BBBY) to “Hold” from “Buy,” and lowered its price target from $76 to $71, saying that it expects a “bumpy ride”.
While Jefferies does expect a “bumpy ride”, the firm also notes that Bed Bath & Beyond Inc. (NASDAQ:BBBY) could eventually become a leader in the home-furnishing retail space. This basically means that Jefferies anticipates short-term problems, yet believes that Bed Bath & Beyond Inc. (NASDAQ:BBBY)’s long-term prospects are promising.
In 2013, Bed Bath & Beyond has seen gains of 21% and currently trades with a P/E ratio of 14.80 (far below the industry average of 18.0) and a price/sales ratio of 1.38. Furthermore, it saw top-line growth of 25% during its last quarter. Therefore, I’m not sure where the analyst is finding fault.
Bed Bath & Beyond Inc. (NASDAQ:BBBY) is not overvalued by any stretch of the imagination. In fact, it meets the requirements of a value investment, with better-than-its-industry growth, while trading at a discount to the industry average.. With that said, I see no reason to sell at these levels, and believe that Jefferies’ call will be proven to be wrong.