Hi there, Fools. I’m back to call your attention to three stocks recently downgraded by Bay Street. While we should always take professional opinions with a grain of salt, downgrades can often call our attention to hidden risks.
And for value investors, they can even be an interesting source of contrarian buy ideas.
So, without further ado, let’s get to it.
Leading off our list is telecom giant BCE (TSX:BCE)(NYSE:BCE), which was downgraded by Citi analyst Adam Ilkowitz from “buy” to “neutral” on Friday. Ilkowitz maintained his price target of $60 per share, pretty much exactly where the stock sits today.
Ilkowitz remains bullish on the company’s operating strategy, execution, and dividend growth. But after a strong start to 2019, he thinks that BCE’s valuation has gotten ahead of itself. According to Ilkowitz, BCE now trades at a premium relative to peers, while Canada’s wireless growth is likely to slow.
“The premium valuation is warranted due to consistency of execution and results, but it’s hard to extend further given the structurally lower growth profile of BCE,” wrote Ilkowitz in a note to clients.
BCE shares are up 11% so far in 2019 and offer a still-healthy dividend yield of 5.1%.
Off the rails
Next up, we have railroad giant Canadian National Railway (TSX:CNR)(NYSE:CNI), which was downgraded by RBC Dominion Securities analyst Walter Spracklin from “outperform” to “sector perform” early last week. Spracklin maintained his price target of $128 per share, just 2% higher from where the stock sits today.
RBC’s downgrade comes off the heels of CN’s poor weather-related Q1 results: adjusted EPS of $1.17 vs. the consensus of $1.20.
Spracklin believes CN will recover nicely but says the valuation is too rich at the moment.
“[T]he significant recent share price appreciation has brought P/E [price-to-earnings] levels to 18.2 times (2020 estimate), which is high by CN’s historical standards,” wrote Spracklin, “and a meaningful (albeit well-deserved, in our view) premium to the peers (17.2 times).”
CN shares are up 24% in 2019 and offer a dividend yield of 1.5%.
Rounding out our list is life insurance giant Great-West Lifeco (TSX:GWO), which was downgraded by Canaccord Genuity analyst Scot Chan from “buy” to “hold” early last week. Chan also planted a price target of $35 per share on the stock, about 10% higher from where it sits today.
Due to the belief that results will likely benefit from the rebound in equity markets, Chan is largely bullish on Canadian insurance companies heading into earnings season next week. But according to Chan, Great West’s risk/reward tradeoff in particular isn’t quite as attractive.
“With a stock gain of 21% year-to-date and its higher relative valuation and below average 19/20 core EPS growth of 4%/4%, we prefer to sit on the sidelines now,” said Chan.
Great West shares currently have a dividend yield of 5%.
The bottom line
There you have it, Fools: three recently downgraded stocks that you might want to check out.
As is always the case, don’t view these downgrades as a list of formal sell recommendations. View them instead as a starting point for more research. The track record of analysts is notoriously mixed, so plenty of your own homework is still required.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Brian Pacampara owns no position in any of the companies mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.