Is Now the Time to Buy these 3 Most Downgraded Stocks?

Key Points

• Nike is on the brink of a reversal, but the question is which pattern it will complete and when the next big rally will start.
• Chipotle Mexican Grill analysts reset their expectations but still see the stock hitting new all-time highs. 
• Foot Locker is trading at rock-bottom prices and may surprise with Q2 bottom-line results. 

Once again, Marketbeat.com’s list of Most Downgraded Stocks has some interesting names. While some are worthy of bearish sentiment, others are on the list because the analysts have reset their bullish expectations. The story is the same regarding Nike NYSE: NKE, Chipotle Mexican Grill NYSE: CMG, and Foot Locker NYSE: FL. They have ugly charts, and the analysts are lowering their price targets but their respective bars have been set low, and the analysts still like them. 

The takeaway is that “Most Downgraded” is as relative as any other statistic about stocks; these stocks are heavily downgraded, but that doesn’t mean investors should sell them. The way the market is set up, these stocks could easily outperform their consensus estimates and catalyze higher share prices. 

Can Nike Sprint Higher? 

Nike is #17 on the list of Most Downgraded Stocks and has been on the list frequently this year. The activity has the stock down roughly 40% since hitting its high in 2021, but the bottom appears to be in. However, the market is at a critical juncture that could mean the difference between a Head & Shoulder’s bottom and a Double Bottom. 

Thirty-four analysts are rating Nike, and 14 have issued recent revisions. They have the stock pegged at Moderate Buy with a price target that is still trending lower. The caveat is that the downtrend in the price target has flattened and could lead the market higher, given the proper catalyst. As it is, the consensus target is about 25% above the recent action, which suggests the Head & Shoulders pattern is more likely. 

The next visible catalyst is the Q3 earnings report due in mid-September. The analysts expect YOY growth and margin improvement but may be underestimating the company’s strengths. Twelve analysts have lowered their targets for revenue and earnings since the last report due to the guidance. The guidance called for mid-single-digit revenue growth with more than 100 basis points of margin expansion. Bulls called the outlook cautious, citing strength in DTC and digital.

Chipotle Mexican Grill is a Hot Tamale 

Chipotle Mexican Grill’s analysts began resetting their expectations due to slowing growth. The problem with that sentiment is that slowing growth results from large numbers; CMG is still producing sizeable growth and value for shareholders, as seen in the analysts' data. The stock has 27 analysts with current ratings. Despite its spot on the Most Downgraded Stocks list, they have it pegged at Moderate Buy. They’ve begun to trim their price targets, indicating a near-term top is in play, but the new consensus is still well above the current price action and deep in new all-time high territory. 

CMG will report Q3 earnings in mid-October and may also catalyze a rally. The analysts expect a sequential decline in revenue which is not impossible but unlikely given the company’s history. Even so, the analysts expect YOY growth and sequential margin improvement that could be amplified by outperformance. The company is leaning hard into store count growth and remodels that include Chipotlanes, a key driver of the company’s digitally-enabled growth strategy. 

Foot Locker at Rock-Bottom Prices 

The chart of Foot Locker is the ugliest of all and suggests the stock could fall another 20% before hitting its absolute bottom. That bottom is near the 2020 lows and unlikely without a negative catalyst. On the other hand, the analysts still see about 20% of upside for the stock, and some of the most recent activity shows a change in sentiment. Telsey Advisory Group reiterated an Outperform rating with a price target that aligns with the consensus figure, while Williams Trading upgraded to Hold from Sell. 

Foot Locker is slated to report Q2 earnings in late August, which will not be good. The catalyst is that the report may not be as bad as the analysts expect. The analysts expect revenue to fall more than 9% compared to last year and for the margin to be low-single-digits.