Two Analyst Upgrades To Buy When Prices Pull Back

The Analysts Upgrades Have Only Just Begun

The 3rd quarter earnings season is drawing to a close and with it, the analyst’s activity is beginning to heat up. The quarter was much better than expected for the broad S&P 500 and that means, for most companies, upgrades and price target increases. To this opportunity into perspective, the 3rd quarter EPS growth rate is running about -6.3% with over 95% of the index reporting. That’s up from a low of -25.2% set in mid-summer and it is reasonable to expect similar if not better performance relative to consensus in the 4th quarter.

Looking forward, the analysts have still not corrected their estimates for the 4th quarter, FY 2020 or FY 2021. The consensus target for 4th quarter earnings is ticking higher but nothing close to the 1900 basis point difference between Q3 consensus and Q3 reality. The 4th quarter consensus is hanging around -10%, close enough that earnings growth could very well be positive by the end of the next reporting cycle. The takeaway is that investors should expect not only to see upgrades and upward revisions but to see them across all sectors and industries.

Monday’s news sparked big moves in at least two stocks that have more upside ahead of them. In both cases, the news caused a massive uptick in price action that I urge investors not to chase. The news is good but it’s a long time until the next earnings season, there will be a better time to buy these stocks.

Roku Gets Street-High Target From Needham

Needham just set the Wall Street high price-target for Roku (NASDAQ:ROKU) citing the company’s positioning and changing demographic habits. The analyst maintained a buy-rating but raised the price target to $315 from $255. The firm says the pandemic has “dramatically reallocated consumer spending” and that is forcing advertisers to adopt connected-TV that much faster. In light of other spending trends, I have to say I agree. Consumers aren’t spending on plane tickets, cruises, hotels or theme parks and instead on home, lifestyle, and socially-distanced entertainment.

Needham’s target implies about a 28% upside for the stock and that may be just the tip of the iceberg. The company reported a surprise 73% increase in revenue for the quarter and the gains are expected to stick. Not only that, the company swung to an operating profit that has the analysts a-twitter and that is a good thing for share prices. There have been 12 major analysts notes out on the stock since it reported 3Q earnings and all are bullish.

Share prices are up about 20% since the earnings report was released. The trend looks strong and the indicators are bullish so investors should expect to see price action continue to move higher. While there is no indication of weakness in the chart there is always risk when buying stocks in an updraft. There could be a pullback, correction, or simple test of support at any time. With shares trading so high above the short-term moving average I would prefer to wait for a pullback before entering.

Gap Moves Higher Before Earnings

Shares of The Gap (NYSE:GPS) are moving higher ahead of earnings on the impetus of an upgrade. The analysts at JPMorgan upgraded the stock to Overweight from Neutral and set the Wall Street high price target on the expectation of a major turnaround in 2021. According to Matthew Boss, the stock has an attractive risk/reward profile after a long period of underperformance. The company is benefiting from multiple trends sparked by the pandemic including decreased competition, eCommerce, and athleisure lifestyle.

The average analyst rating on The Gap is Hold with a consensus target near $20. That’s about a 20% downside compared to the 20% upside implied by JPMorgan. Shares of The Gap have made a stunning recovery from the March bottom but look extended at current price levels. The stock is trading nearly 20% above its 30-day moving average with weak and divergent indicators. Both stochastic and MACD are still bullish so I am not expecting a price-reversal. What I am expecting is profit-taking or even some short-selling to drive price action down to a more reasonable entry point.

The Gap is slated to report earnings today and may shed light on another opportunity. The dividend. The Gap suspended its dividend earlier this year in an effort to control costs and hoard cash. The 2nd quarter results, for one, were good enough to put the dividend back on the table if not this quarter then in early 2021.