Don’t Go Bottom-Fishing For These Names Just Yet
Price weakness, particularly post-earnings release price weakness in what is otherwise a good, healthy company is often a good time to buy stock. The problem is that all too often bottom-fishing turns an investment into dead money or worse, into a loss that could have otherwise been avoided. While Footlocker and Deere & Company have many positive attributes, there were issues within the earnings reports that we see capping gains in the near to mid-term if not longer. More importantly, the analyst community is noting many of the same issues and lowering their price targets and ratings for these names.
Deere & Company Plunges On Supply Chain Woe
Deere & Company (NYSE: DE) had a good quarter and beat the Marketbeat.com consensus on the top and bottom line but by very slim margins. The revenue beat by only 160 basis points which means the nearly 11.0% in growth was priced into the stock and the guidance didn’t give a catalyst for higher share prices either. While the company increased the guidance for the year it only raised the outlook marginally and that is mostly due to special items realized during the quarter. The takeaway is that results and guidance are “underwhelming”, as BMO analyst John Joyner put it, and now that is getting priced into the market.
Deere & Company has received at least 8 analysts' commentaries since the Q2 earnings report was released and none of them are good. All 8 include a price target reduction that has the Marketbeat.com consensus price target down over the last 30 days and trending flat over the last 90. Based on our view of the results and the economic outlook, we don’t expect to see that trend change soon and it could worsen before it gets better. Demand remains high for Deere & Company products but supply chain and production-related disruptions are expected to continue through the end of the fiscal year.
Ross Stores No Bargain At These Prices
Shares of Ross Stores (NASDAQ: ROST) fell hard in the wake of the Q1 earnings report on top and bottom line weakness. The miss was all the more surprising due to the inflationary environment that should be pushing customers toward the discount retailers. The problem may be, however, that Ross Stores' client base is among the hardest hit by inflation which could results in weakness later in the year as well. The company already lowered its guidance and we think it may lower guidance again if gasoline prices do not come down.
The analysts are still rating the stock a Buy but it is a weak Buy down from a firm Buy earlier this year. The Marketbeat.com price target is also slipping and down in the 12, 3, and 1-month comparisons. There have been at least 9 analysts' notes out since the release with all 9 lowering the price target and 1, Telsey Advisory Group, downgrading the stock to Marketperform from Outperform, and we don’t think they will be the last.
The price action in Ross Stores is rebounding from the new low but we don’t think investors should chase the action. While the rebound is showing some signs of strength it is still well below what we consider to be a very strong resistance target. It is our opinion that, without some change to the fundamental picture, price action will be capped at the $87.75 level and will then move sideways within a range. Investors interested in this name are better off waiting for the stock to retest the lows near $70.
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