Analysts typically issue price ratings in response to a company’s earnings reports. So, what’s significant about stocks with lowered price targets? Sometimes a little and sometimes a lot. As is the case with many things, the reason for the downgrade is significant.
Earnings season gives investors a progress report, of sorts, on publicly traded companies. The headline numbers tell you what’s already been done, while the guidance that companies provide gives investors an indication of what the future may hold.
Analysts that cover these companies frequently issue ratings and/or price targets in the hours or days after companies deliver their earnings reports. An upgrade or a downgrade can significantly move a stock’s price. This can give investors an idea of what institutional investors believe is a fair value for the stock.
How much weight should you place on stocks with lowered price targets? If one analyst is an outlier, maybe not much, but if multiple analysts are souring on a stock, it’s something to watch. And who is doing the downgrading matters as well. Here are three stocks with lowered price targets, downgraded by JPMorgan Chase (NYSE:JPM).
McDonald’s (MCD)
Death, taxes and McDonald’s (NYSE:MCD) beating on same-store sales. These are some things that investors have come to rely on. Even with concerns about the company’s pricing and pricing power, the company would still manage to calm investors’ concerns with an as-expected earnings report.
That didn’t happen. McDonald’s missed on the top and bottom lines and reported a decline in same-store sales for the first time since 2020. At that time, the miss was easily understood. This time around, it’s more concerning.
McDonald’s is in the unenviable position of being considered too expensive. According to the company’s management prices have “only increased 40%” since 2019. But that’s little comfort to low-income households who no longer see the company as offering good value.
And that’s trouble for the MCD stock price, which reached a high of nearly $300 per share because of rising earnings, which was due to “strategic price increases.” Analysts have been quick to lower their price targets on the stock, with JPMorgan Chase lowering their price target from $290 to $270. The company’s closing price on July 30 was around $266. The takeaway is that McDonald’s is a Hold — at best.
Novavax (NVAX)
Novavax (NASDAQ:NVAX) is next on this list of stocks with lowered price targets. Like McDonald’s, this is a question of valuation. NVAX stock is up 153% in 2024 and over 200% in the six months ending July 30. The reason is the company’s likely first-mover advantage with a vaccine for the JN.1 variant that the U.S. Food & Drug Administration (FDA) recommended as the target of booster shots in 2024.
However, JPMorgan and other analysts are questioning how much of a premium that warrants. Their answer is that Novavax stock is now well above its intrinsic value. Not only did JPMorgan Chase lower its price target, but it also downgraded the stock from Neutral to Underweight. That’s the equivalent of a Sell rating and JPMorgan’s lowest rating.
Novavax announced a partnership with Sanofi (NASDAQ:SNY) that will allow it to commercialize its Covid-19 vaccine as early as next year. This got many investors excited about NVAX stock. But in recent months, it’s drawn the attention of short sellers. With short interest over 22%, investors will want to wait for a pullback before jumping in on Novavax.
Frontier Group (ULCC)
Frontier Group (NASDAQ:ULCC) is scheduled to report its second-quarter earnings on August 6. Some analysts have high hopes for the report, which the company is forecasting will show a 6.6% sequential growth in revenue and 55% year-over-year growth in earnings. That would be evidence that the company is seeing the capacity expansion it forecasted.
However, JPMorgan isn’t waiting until earnings to express its skepticism about the upcoming earnings. The company didn’t offer a price target but downgraded ULCC stock to Underweight.
Bulls will point out that Frontier Group’s fleet of jets includes 142 Airbus models as of March 31. That’s allowed the company to keep more planes in the air at a time when several competitors have a significant percentage of their fleets grounded.
That said, this is a tiny airline and a tiny company with a market cap of around $891 million. It could certainly benefit from a rate cut or two to help shore up its balance sheet. At that point, analysts may revisit their price targets. But for now, the stock is only a speculative buy for the most long-term investors.
On the date of publication, Chris Markoch had a LONG position in MCD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.