3 Stocks Hit Hard By Downgrades This Week

By Daniel Miller Markets Fool.com


Image source: Getty Images.

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After President Donald Trump's inaugural speech, the markets managed a small rally Friday with the Dow Jones Industrial Average and S&P 500 clinging to narrow weekly gains of 0.48% and 0.34%, respectively. While much of the speech was rhetoric that we've already heard, it was made fairly clear that, by Monday, we'll see actions in terms of executive orders that will set the tone for the administration. Keep an eye out for that!

Oil futures climbed on Friday and for the week, with March WTI crude remaining in the middle of January's rough range of between $52 and $54. In other news, here are a handful of stocks that got hit due to downgrades.

Renting not wanted

Aaron's Inc. (NYSE: AAN), a rent-to-own retailer, was hit fairly hard Thursday with the stock trading about 10% lower before recovering some of that loss on Friday after it was downgraded from strong buy to market perform by Raymond James analysts.

Two reasons formed the cornerstone of the downgrade: valuation and a poor preliminary result from competitor Rent-A-Center. More specifically, analyst Budd Bugatch noted that the stock had nearly reached his prior price target of $34. However, in my opinion, with a forward price-to-earnings ratio of 11.7 based on forward estimates per Morningstar, it hardly seems out of control.

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But his second reason for the downgrade points to Rent-A-Center's preliminary results -- which is certainly reason for concern. It reported its comparable sales at its Core U.S. business fell 14.2%, while comparable sales at its Acceptance Now stores were down 1% to 2%. (The store counts are roughly evenly split between the two.)

Rent-A-Center's profitability is also expected to take a big hit, but some of that is due to its POS management switchover and continuing issues, so that won't necessarily extrapolate to Aaron's woes -- but weak comparable-store sales give reason for caution heading forward.

Ecommerce taking a toll?

Shares of GNC Holdings Inc. (NYSE: GNC) had a rough Thursday, trading nearly 17% lower for the day, and hardly recovering any of those losses on Friday. Similar to Aaron's, the issue was an analyst downgrade. Goldman Sachs' Stephen Tanal downgraded GNC to sell from neutral, and slashed his price target from $12 per share down to $8 per share.

GNC has been on a downward spiral since about 2014, forcing the company to change its business strategy. It cut prices meaningfully across about half its products and discontinued its Gold Card loyalty program. Even if this works -- and to what degree -- it's going to take some time. We'll have to wait and see.

Color me skeptical, as well, in regards to a permanent turnaround. Personally, as someone who has purchased supplements online for a decade, there was never any draw for me to visit GNC and its overpriced products. It's always been cheaper to purchase online -- a trend we're seeing across many industries in this e-commerce era. Maybe its price cuts can help turn things around and maybe not. What you can't argue is that the growth story has stalled.

GNC data by YCharts.

Sticking with the theme

While we're at it, we might as well cover TransDigm Group Incorporated's (NYSE: TDG) struggle on Friday. Shares of the airplane parts and components supplier finished about 10% lower Friday after Citron Research released a pretty harsh note on the company, calling it "the Valeant of the Aerospace Industry." Ouch! And if you aren't aware of Valeant, just Google "Valeant implosion," and you'll likely find all necessary reading materials.

This is really a tough stock to gauge, especially throwing in the Donald Trump factor. The company has a solid business and boasts margins that trounce its closest competitors. However, that's an issue, as TransDigm generates roughly one-third of its sales from defense -- with those aforementioned bloated margins -- it could put a target on the company from Trump noting defense companies are overcharging for products.On the other hand, perhaps Trump has bigger fish to fry. Morningstar Analyst Chris Higgins notes that "TransDigm's defense sales represent about 0.15% of the $590 billion-plus annual U.S. defense budget."

TransDigm has a strong business and economic moat based on its extensive knowledge base on how to build commercial aircraft parts to code. Once on board, the aircraft manufacturers would be reluctant to remove TransDigm's parts in favor of a less proven competitor. However, TransDigm's business strategy uses significant balance-sheet leverage to acquire many companies, which is a risk investors have to accept.

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Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool has a disclosure policy.