Time to Sell? 3 Recent Analyst Downgrades Worth Analyzing

Stocks to sell

S&P 500 companies have reported strong earnings this season, with 79% surpassing profit expectations, according to Bloomberg’s data. However, these results have not significantly bolstered stock performance, with the median stock outperforming the index by less than 0.1% on the day earnings were announced, despite some sectors facing analyst downgrades.

This marginal gain marks the smallest since late 2020, suggesting that robust earnings alone may no longer drive stock rallies. The tepid response from the market appears to stem from concerns over future earnings. Investors are showing signs of skepticism, penalizing stocks that offer weaker-than-expected future guidance. 

Among the S&P 500 firms providing forward-looking statements through April, only 15% presented forecasts that exceeded analysts’ estimates, which is the second-lowest figure since the pandemic began. Despite a slight improvement in the last week, with companies like Apple Inc. issuing optimistic forecasts, the overall percentage remains low at 18%.

Investors are scrutinizing company valuations more closely, especially as the S&P 500 has seen a 20% surge from the end of October through April, trading at a premium of 11% above its 10-year average. The current economic backdrop, characterized by slow growth, persistent inflation and uncertainty around interest rate cuts, has heightened the importance of future earnings growth to justify these high valuations.

The tech sector, particularly chipmakers, is expected to see robust growth of approximately 40% in the second quarter, outshining other industries. However, even this strong projection has not been enough to maintain the Nasdaq 100 Index above its pre-earnings season levels. 

Along these lines, we look at 3 stocks that experienced analyst downgrades, with their ratings adjusted by major Wall Street research firms in the last week.

Expedia (EXPE)

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Expedia (NASDAQ:EXPE) saw its stock rating downgraded by two major financial firms last week. BMO Capital Markets cut its rating from Outperform to Market Perform and reduced the price target to $145 from the previous $165. 

Piper Sandler also downgraded Expedia, moving from Overweight to Neutral, with a new price target of $145, down from $175.

BMO’s revised stance on Expedia is attributed to slower than anticipated adoption of Vrbo, despite significant investments in technology and increased marketing expenditures planned for the first quarter of 2024. 

Furthermore, Hotels.com has encountered unexpected growth challenges due to technical migration issues and changes to its loyalty program. BMO anticipates Expedia to intensify marketing efforts to bolster Vrbo in 2024, although the firm acknowledges that current visibility into the outcomes of these efforts is limited.

Piper Sandler’s downgrade comes in the context of a leadership transition at Expedia, with outgoing CEO Peter Kern handing over responsibilities to incoming CEO Ariane Gorin. The broker noted that management has revised its guidance for the year downward, confirming market concerns about slowing bookings growth.

Moreover, the anticipated benefits to profit margins from technological advancements and a recent reduction in force have yet to materialize. Piper Sandler has decided to adopt a more cautious approach, stepping back to reassess the situation with the new price target of $145.

Paramount (PARA)

Seaport Research Partners lowered the rating on Paramount Global (NASDAQ:PARA) stock to Neutral from Buy. The analysts made their move amid concerns over the increasing complexity and potential volatility of the company’s corporate structure. 

Paramount Global’s shares have risen this year, approaching Seaport’s price target, fueled by speculation of a potential all-cash acquisition by a Sony (NYSE:SONY)/Apollo (NYSE:APO) consortium. The firm pointed out that if the rumored merger with Skydance, KKR and RedBird goes through, Paramount’s minority shareholders might see a 30% premium on an $11 per share reference price.

This proposed price is in line with the stock’s closing price on the day of the announcement and is nearing Seaport’s $15 price target. The speculated deal that would bring Paramount under the Sony/Apollo umbrella is believed to potentially value the media company’s equity at around $21 per share, provided that all shareholders are treated equally. 

Sprout Social (SPRT)

Sprout Social (NASDAQ:SPT) shares were subject to analyst downgrades by as many as 6 financial firms. For instance, Piper Sandler moved its rating from Overweight to Neutral, also reducing the price target to $40 from the previous $66.

The analyst downgrades come after Sprout Social’s first-quarter results, which did not meet the anticipated rebound in growth. The company’s Annual Recurring Revenue (ARR) trends raised concerns, as the expected recovery post-churn did not materialize.

Despite a strategic focus on eliminating lower-end market churn by the end of the previous year, the Q1 revenue fell short of guidance, and projections for the fiscal year 2024 were decreased by $20 million. This implies a growth rate in the high teens for the second half of the year, even when factoring in contributions from Tagger, analysts said.

Similarly, BTIG adjusted its rating from Buy to Neutral after Sprout Social’s first-quarter results. The company’s updated guidance reflected significant changes to its go-to-market strategy, which is expected to require several quarters to positively impact the business model, BTIG said.

Both firms indicated that Sprout Social’s strategic shifts and the resulting changes in financial projections have led to a more cautious stance on the stock, with expectations for a more pronounced improvement in performance later in the year.

On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Shane Neagle is fascinated by the ways in which technology is poised to disrupt investing. He specializes in fundamental analysis and growth investing.