Devon Energy: Beaten Down and Underappreciated
Devon Energy, an independent energy operator in the U.S., has experienced a significant downturn in its stock price over the past year due to the decline in oil prices and demand outlook. This has led to 51 negative or bearish revisions in 2023, including a 30% decline in the MarketBeat.com consensus price target. While the downward action in the price target has contributed to the stock’s downtrend, the market seems to have underestimated Devon Energy’s potential.
Despite the negative analyst revisions, Devon Energy still holds a “moderate buy” rating due to its strong cash flow and capital returns. The stock is currently trading at $41.50, well below the low end of its range, presenting a deep-value opportunity for investors. Additionally, Devon Energy pays a solid dividend, with a trailing twelve-month yield of 6.8% in early January 2024. Analysts expect the company’s revenue to drop slightly compared to 2023 but anticipate a widening margin due to increased output and efficiency.
Nike: Analysts Raised Ratings in 2023
Nike, a leading athletic apparel and footwear company, has faced a mix of negative and positive revisions in 2023, resulting in an overall improvement in sentiment and a shift from a “hold” rating to a “moderate buy” rating. While the price target has seen a slight decrease, the stock price’s current 3% decline offers a tepid obstacle for new investors. With a target of $123.50, there is potential for approximately 20% upside.
Nike experienced some weakness in 2023, with growth slowing and falling short of expectations. One of the contributing factors was an inventory reset, which is expected to be near completion. As the inventory normalization process comes to an end, growth is forecasted to return by the end of the year. In the next fiscal year, Nike anticipates mid-to-high single-digit top-line growth and margin expansion.
Nike also offers a dividend yield near 1.4%, which is at the high end of the ten-year range. With shares near a multi-year low, distribution growth is expected to continue this year. Share repurchases further enhance the effective yield, with a 2.5% decrease in the diluted share count at the end of the last quarter.
Home Depot to Benefit from FOMC Rate Cuts
Home Depot, the well-known home improvement retailer, faced 39 negative revisions in 2023. However, there has been a significant shift in sentiment with three recent upgrades from Neutral-equivalent ratings to Outperform-equivalent ratings. Although the consensus price target still lags, these upgrades include revisions to above-consensus price points, which have pushed the market higher.
Piper Sandler analysts view Home Depot as the better-positioned retailer to capture home improvement spending in 2024. The company’s focus on the professional industry puts it in a prime position to win larger projects as homeowners take advantage of HELOCs (Home Equity Line of Credit) following peak interest rates. Revenue growth is expected to return as early as the current quarter, stabilizing the capital return outlook.
Home Depot maintains a reliable dividend payout, with earnings accounting for 55% of the dividend. The question remains regarding share repurchases, which were solid in 2023 but may slow down in 2024.
Downgrades Can Present Buying Opportunities
While downgrades and downward revisions to price targets may have short-term impacts on stock prices, they can also create buying opportunities for long-term investors. Downgrades are not necessarily bad, just as upgrades are not always a reason to buy. In some cases, downgrades reflect a natural and healthy part of market mechanics.
Investors should consider the underlying fundamentals and long-term prospects of a stock before making any investment decisions. In the case of Devon Energy, Nike, and Home Depot, all three stocks command a “moderate buy” rating despite the negative analyst activity. They also offer solid dividend payouts and have secular tailwinds to sustain business in the long term.
Three Downgraded Names to Consider as Long-Term Winners
Devon Energy, Nike, and Home Depot may have experienced negative revisions and downgrades, but they possess qualities and characteristics that make them stand out as long-term winners. These companies offer attractive investment opportunities:
– Devon Energy has been beaten down due to oil price declines but still has a “moderate buy” rating. It presents a deep-value opportunity with a solid dividend payout.
– Nike, despite some weaknesses in the past, is expected to see growth return. With a dividend yield at the high end of the range and ongoing share repurchases, it offers potential upside for investors.
– Home Depot is well-positioned to benefit from the continued boom in the home improvement industry. Recent upgrades and the company’s focus on the professional sector make it an attractive investment option.
Investors should conduct thorough research and consider their own risk tolerance before investing in any stock. However, these three downgraded names have the potential to be long-term winners and should not be dismissed solely based on recent negative revisions.
Analyst comment
Devon Energy: Neutral news. The market seems to have underestimated Devon Energy’s potential. The stock presents a deep-value opportunity due to its strong cash flow and capital returns.
Nike: Positive news. Despite some weaknesses, growth is expected to return. With a dividend yield at the high end of the range and ongoing share repurchases, it offers potential upside for investors.
Home Depot: Positive news. Recent upgrades and the company’s focus on the professional sector make it an attractive investment option. Revenue growth is expected to return, stabilizing the capital return outlook.
Market Analysis: Downgrades can present buying opportunities. Investors should consider the underlying fundamentals and long-term prospects of these stocks, which command a “moderate buy” rating. They also offer solid dividend payouts and have secular tailwinds to sustain business in the long term.
