Investors expect too much from these companies.
The stock market’s October hiccup reset the valuations of a number of popular stocks. But the sell-off was a friendly reminder to all investors that expectations can get easily get a bit too high on Wall Street. Bank of America uses its Beat Factor screen to identify stocks with consensus earnings estimates and price targets that are too high or too low. Beat Factor scores range from -100 to +100, with negative numbers corresponding to earnings and price target expectations that the Bank of America analyst team deems too high. Here are eight of those stocks with unrealistically high expectations.
Williams-Sonoma (ticker: WSM)
On the surface, a 2.8 percent dividend and a sub-20 price-earnings ratio may seem appealing. However, analyst Curtis Nagle says there are plenty of red flags with Williams-Sonoma stock. Nagle says an increasingly competitive environment and pricing pressures will weigh on the company’s margins, and a strong consumer environment is somehow not translating to particularly impressive sales growth. Williams-Sonoma has a Beat Factor score of -100, the lowest score among all the stocks screened. Bank of America has an “underperform” rating and $47 price target for WSM stock.
Chipotle Mexican Grill (CMG)
Expectations for Chipotle shot higher earlier this year when the company announced former Taco Bell head Brian Niccol as new CEO. Unfortunately, with CMG stock up 70 percent year-to-date, analyst Gregory Francfort says Chipotle and Niccol still have a major uphill climb. With mid-single digit same-restaurant sales growth already priced into the stock, Francfort says Chipotle will be forced to generate extremely high traffic growth to please the market. Chipotle has a Beat Factor score of -91. Bank of America has an “underperform” rating and $340 price target for CMG stock.
Tesla (TSLA)
Tesla investors breathed a sigh of relief after the company delivered on its promise to report a profitable third quarter, but analyst John Murphy says Tesla is far from out of the woods. In fact, Murphy says the third quarter may be the best quarter Tesla investors see for a long time. He says all Tesla proved in the third quarter is that it is on the path to becoming an overpriced, lower-margin automaker. Tesla’s Beat Factor is -89. Bank of America has an “underperform” rating and $220 price target for TSLA stock.
Nike (NKE)
Nike shares have been on a tear over the past year, gaining more than 40 percent. Unfortunately, analyst Robert Ohmes says the market’s long-term expectations for Nike have gotten too high. Ohmes says Nike is losing global market share to Adidas (ADDYY) and VF Corp. (VFC), the European market is extremely difficult, fashion trends in China are shifting away from performance brands and NKE stock is near its peak historical valuation. Nike has a Beat Factor score of -84. Bank of America has an “underperform” rating and $55 price target for NKE stock.
BlackBerry Limited (BB)
BlackBerry stock gained 62 percent in 2017 on optimism that its pivot from smartphone hardware to mobile security was starting to gain traction. However, BB stock is down 19.5 percent in 2018 as the reality has set in that a return to meaningful profitability may take longer than anticipated. Analyst Daniel Bartus says BlackBerry has a low long-term growth profile and is entering a fiercely competitive industry that will make outperformance extremely difficult. BlackBerry has a Beat Factor score of -84. Bank of America has an “underperform” rating and $9 price target for BB stock.
Shopify (SHOP)
Shopify has a high-growth business of cloud-based e-commerce solutions for small businesses. Shopify reported impressive 58 percent revenue growth in the most recent quarter, but analyst Brad Sills says it’s simply not enough to justify the stock’s lofty valuation, especially considering recent sales upside has come from its lower-margin payments business. Shopify is trading at an enterprise multiple premium to its software-as-a-service peer group, and the stock is currently priced at about 19 times sales. Shopify has a Beat Factor score of -82. Bank of America has an “underperform” rating and $130 price target for SHOP stock.
Campbell Soup Co. (CPB)
Analyst Bryan Spillane says Campbell Soup is going through a transitional year in fiscal 2019, resulting in declines in earnings and sales. Spillane says those declines coupled with the company’s large debt burden will likely keep the stock’s valuation depressed. Campbell is also currently dealing with the distraction of a proxy fight with an activist investor. Regardless of the outcome, Spillane says the turnaround effort will likely be a slow, long process. Campbell Soup has a Beat Factor score of -82. Bank of America has an “underperform” rating and $31 price target for CPB stock.
TripAdvisor (TRIP)
TripAdvisor has a massive base of 450 million average monthly visitors to its travel sites, but analyst Nat Schindler says the company may struggle to further monetize these users. With rising expenses and growing marketing costs, Schindler says margins will likely be pressured in the longer term. Schindler says low-to-mid-single digit earnings and revenue growth is not good enough to support a forward P/E ratio of above 33. TripAdvisor has a Beat Factor score of -68. Bank of America has an “underperform” rating and $38 price target for TRIP stock.
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