The S&P 500’s September drop is putting bulls to the test. And analysts are going as far as axing their recommendations on some stocks.
Analysts cut average recommendations by 5% or more, along with their 12-month price targets, over the the past month on nine stocks in the S&P 500. They include struggling energy stock Occidental Petroleum (OXY), financial giants Wells Fargo (WFC) and Citigroup (C) plus communications services company Take-Two Interactive (TTWO).
This Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith shows how analysts are starting to shift their stances with the S&P 500’s gains for the year at risk. Apple (AAPL) recently saw a key downgrade, although not enough to make this list. And high-flying electric car maker Nikola (NKLA), while not in the S&P 500, is also losing stead with analysts.
All told, analysts cut recommendations on 192 S&P 500 stocks in the past month. And they’ve raised them on just 75.
Stocks in the summer were “coming back from a place of strength,” said Joe Kinahan, chief market strategist at TD Ameritrade. “Now, we’re coming back, I won’t say from a place of weakness, but certainly not from a place of strength. I do think that will come back, I just don’t think we’re going to go straight up like last time. I think it’ll be a much tougher road.”
Analysts Brace For S&P 500 Trouble
September is serving up a major gut check for investors. This week, IBD updated its outlook to “market in correction” as many leaders falter and drop into a correction. The Technology Select Sector SPDR (XLK) is down more than 10% just in September.
Investors have seen much of their paper wins vanish this year, as they cling to a $375 billion gain or roughly 1%, says Wilshire Associates. They had been up as much as $3.4 trillion, or 9.9%, on the year coming into September.
Most of the pain during September, though, is carried by the energy sector. The Energy Select Sector SPDR ETF (XLE) is down another 15.5% in September so far. That’s a staggering loss, which cuts the sector’s value in half this year.
To that end, Occidental is suffering more indignity. Just after Warren Buffett dumped his holdings, analysts cut their recommendation more than 5% in a month’s time to a “hold.” Hold really means “sell” for many analysts. And they’ve cut their price target, too, by more than 8% in a month’s time to 15.25. Occidental closed Thursday at 10.70, down 74% this year.
Financials: A Looming Risk For The S&P 500
All eyes are on the banks. The Federal Reserve is holding interest rates down. That lowers bank’s borrowing costs, but also lowers rates it charges for loans. Meanwhile, there’s a housing boom raging. The tug of war is a test of the recovery’s push versus the recession’s pull.
Even so, the Financial Select Sector SPDR ETF (XLF) is down 7.5% this month. More alarmingly, analysts are cutting ratings and targets on key banks. Citigroup’s average recommendation is down more than 5% in a month. And its average price target is down nearly 2% to 66.23. Citi closed at 42.20 on Thursday, down more than 45% this year. Analysts, though, still rate it an “outperform,” just less strongly.
And Wells Fargo, another stock Buffett dumped this year, is no better. The stock already lost half its value this year to 23.41. Even so, analysts cut their rating more than 10% in a month to a “hold” and trimmed the price target by 0.5% to 27.28.
Troubles with financials concerns Kinahan. “I’m probably worried the most about … the financials,” he said. “There’s just nothing there to give them momentum” which is a problem as the sector is needed for a broad S&P 500 rally, he says. Financials are the fourth largest sector in the S&P 500, at 9.7%, behind technology, health care and consumer discretionary.
S&P 500: Analysts Question Some Leaders, Too
Analysts are mainly downgrading downtrodden S&P 500 stocks. But there are some exceptions.
And yet, analysts cut their recommendation on the stock the past month by 8.5%. It’s still an “outperform,” but analysts trimmed their price target by 2.2%, too, to 181.50. Some investors are worried many of these stocks ran up so much already, they’re already priced for a solid year, Kinahan says. Analysts now think Take-Two’s profit will fall nearly 10% in its current fiscal year.
Analysts don’t think you’re crazy to own most of these stocks. Some of these stocks still have implied upside to analysts’ price targets. But the question is: Are analysts downgrades ahead of the curve or woefully behind?
Analysts Cut Ratings And Targets On These S&P 500 Stocks
The trend is down the past month
|Company||Symbol||One-Month % Change In Analysts’ Recommendation||Analysts’ Ch. In Price Target In Past Month||Sector||Stock YTD % Ch.||IBD Composite Rating|
|Take-Two Interactive||TTWO||-8.5||-2.2||Communication Services||33.4%||97|
|Public Service Enterprise||PEG||-5.0||-0.1||Utilities||-9.4%||66|
Source: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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