Normally, when you hear about a stock getting downgraded, it's for one of a set of fairly good reasons. It missed the consensus earnings estimate. It missed the consensus profit estimate. Its own estimates for the next year are down. All of these are fairly valid reasons to lose a little faith in a company and its management. Much less often, however, do you hear about a stock losing strength in recommendations because it's just doing too gosh darn well in the open market. That puzzling outcome is what happened recently to Domino's Pizza (NYSE: DPZ) as Stifel cut its recommendation on the strength of, well, too much strength.
Domino's Looking Hot and Fresh After Its Earnings Report
Stifel's cut from “buy” to “hold” comes at a bizarre time for Domino's Pizza. Just last Thursday, the company brought out an earnings report that beat expectations, and sent the stock on a rocket sled upward, gaining 27.6% just for that week.
Just in the last year, the company has gained 42.7%. That makes it a better investment than the entire S&P 500 index, which gained just 19.5% in the same time period.
As if that weren't good enough to suggest that Domino's should be a screaming buy, the company also released its two-to-three year outlook (the company doesn't offer quarterly or annual figures) that suggested that even its pessimism would mean hefty growth. Global retail sales were expected to climb between 7% and 10%, while the United States same-store sales went up between 2% and 5%. International same-store sales growth was set to increase in a similar fashion, from 1% to 4%.
So Why is Stifel Gagging on This Report?
All of that together should be a win for Domino's, but Stifel is looking at it a different way. While it agrees that the company's growth outlook is valid, and sound, there's a point getting in the way: Domino's current stock price. The stock closed out last Friday at $371.63 per share, and is currently trading significantly lower, down around $362.42 as of this writing.
Stifel believes that the stock itself is, essentially, overpriced, and would re-evaluate its measures once Domino's shares drop to somewhere in the $300 to $350 range. However, Stifel also raised its price target on Domino's shares from its previous $325—where the shares would have been a buy—to $365, which is out of Stifel's own buy-in range.
Stifel Isn't Alone Here
Perhaps worse for Domino's in the short term is that Stifel doesn't seem to be alone in some moderate share-price concerns. MKM Partners is holding on to its “neutral” rating for Domino's stock, despite admitting that it dropped the ball with such an assessment in the previous round. It maintained its assessment for mostly the same reason as Stifel; though it has quite a bit of faith in the company's course strategically, the share prices are just a bit too high right now for it to suggest pursuit. Its current fair-value estimate, meanwhile, is $350, in line with Stifel's.
It Is Possible to Be Just a Little Too Good, Sometimes
Basically, the consensus view seems to be that Domino's shares are just a little too valuable for their own good. This is actually a similar line of thought to some we've seen in the Tesla market; it's not that Tesla isn't a valuable company putting out a potential game-changer in the field, it's that the share prices are getting just a little too optimistic to be sustainable at their current level. That increases the chance of a downturn later—especially if there's any kind of hiccup in earnings—and makes it a little less attractive.
No one wants to buy in at a market top, and for analysts like Stifel and MKM, the top may be here already for Domino's. Not that Domino's is likely to lose a lot of ground; with coronavirus fears still running rampant, the idea of ordering out for pizza might be a little more attractive to those who would have gone out to eat and sat for an hour in the middle of a sea of people with varying levels of personal hygiene.
Still, it's possible for a stock to take on a value that's higher than it should be, and for some analysts out there, Domino's has reached that point. Given that the stock has already lost some ground with the opening of the market today, they may be right. The good news is that the consensus floor doesn't seem too far away, so maybe a little profit-taking wouldn't be a bad idea right now.