I’d be the first to agree that Wall Street analysts are often wrong. Quite frequently, in fact, in the case of analyst downgrades, they focus excessively on minutiae, such as tiny “misses” (i.e., quarterly results that come in slightly below analysts’ average estimates) or a small decline in profit margins. And they often overlook or minimize huge opportunities that companies have, such as game-changing technologies or an ability to gain market share over the long term.
On the other hand, sometimes analysts uncover important information and/or make very good points. For investors, it’s particularly important to pay attention to analyst downgrades of stocks they own or are thinking of buying. That’s because those downgrades can include important, new information that, in some cases, should cause investors to sell a stock or avoid buying a company’s shares.
Here are three analyst downgrades you should be aware of if you have a bullish position in the stocks below or you’re thinking of opening such a position.
SoFi Technologies (SOFI)
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Wedbush noted that SoFi had only increased its guidance by a small amount even though its first-quarter results beat analysts’ estimates by a sizeable margin. Much more importantly, in my view, the firm warned that after SoFi had failed to unload any of its loans in Q1, the value of its loans could sink when it starts selling them again.
“We believe SOFI not selling loans in Q1 could imply that gain on sale margins aren’t trending at similar elevated levels to those generated last year or that the market for loans may have weakened,” Wedbush said.
In a May 5 column, I went much further, warning that SoFi’s “personal loan portfolio could be problematic and unattractive” given the fact that it had failed to sell any of these loans and some of its key customers are likely experiencing financial difficulties.
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Investment bank TD Cowen cut its rating on Coinbase (NASDAQ:COIN) stock to “underperform” from “neutral” on March 24 after the company announced that it had received a Wells notice from the Security and Exchange Commission. The SEC uses Wells notices to inform companies that the agency’s staff has recommended that they be charged with a violation of the nation’s securities rules and/or laws.
Coinbase stated that the SEC’s staff has likely recommended that the agency file charges related to the company’s “core trading operations as well as an interest-bearing service, institutional trading solution, and custody business,” Barron’s reported.
TD Cowen warned that “multiple prongs of Coinbase’s business are increasingly under threat of potential SEC enforcement action.” Further, the bank thinks that the news could negatively impact the company’s business.
In a related, more recent note, investment bank Berenberg started coverage of COIN stock with a “neutral” rating, warning that the SEC would soon charge the cryptocurrency exchange platform with violations. The firm suggested that the agency would seek to force Coinbase to shut down key parts of its business, as it has done with other crypto exchanges in the past year. Berenberg set a $55 price target on the stock, which is almost 9% below where it currently trades.
Exxon Mobil (XOM)
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Goldman Sachs downgraded Exxon Mobil (NYSE:XOM) to “neutral” from “buy” on valuation concerns on May 1, stating that the shares price “now appears to better reflect the structural turnaround in the business.”
The investment bank noted that, at the time, XOM was changing hands based on “a 7% free cash flow yield on 2024 estimates at $85/bbl Brent.”
Exxon’s share price was around $116 at the time. It has fallen 8.8% since then.
As I noted in a recent column, I’m bearish on oil stocks because, “I think that oil traders are finally noticing that electric-vehicle sales are soaring in the U.S., China, and the EU, while hydrogen could, in the not-too-distant future, become a viable alternative to oil-derived fuels for large trucks and planes. ”
As a result, I expect oil prices to remain well below $85 for the foreseeable future, making most oil stocks, including XOM, unattractive at this point.
On the date of publication, Larry Ramer held a short position in COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.
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