Investors should always scrutinize suggestions from Wall Street analysts, who often upgrade stocks after big rallies or downgrade them after significant declines. Those after-the-fact moves, which reflect the herd-like mentality of some firms, generally don't help individual investors.
Therefore, contrarian investors should examine the stocks Wall Street has given up on, since the worst-case scenarios are typically already priced in. Today, our Motley Fool investors will highlight three stocks that fit that description -- J.C. Penney (NYSE: JCP), Wells Fargo (NYSE: WFC), and Calavo Growers (NASDAQ: CVGW).
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It's not the next Sears... yet
Leo Sun (J.C. Penney): J.C. Penney is often called the "next Sears." None of the 16 analysts who cover J.C. Penney have a "buy" rating on the stock, and four have slapped it with the dreaded "sell" rating.
However, J.C. Penney isn't in the same boat as Sears yet. Its sales declines are milder, nearly half of its $4.2 billion in long-term debt isn't due until 2023, and its new CEO, Jill Soltau, is aggressively clearing out excess inventory.
J.C. Penney's comps turned negative in the third quarter with a 5.4% drop, and its holiday period comps fell 5.4% -- or 4.5% and 3.5%, respectively, on a shifted basis. Those numbers look ugly, but its slight improvement in shifted comps indicates that its declines could be bottoming out.
It also reiterated its targets for generating positive free cash flow in 2018, reducing its inventory by more than 8%, and finishing the year with over $2 billion in liquidity. It also plans to close several stores and explore the monetization of its real estate assets.
J.C. Penney remains a very risky stock, and analysts expect its sales growth to stay negative as its bottom line remains in the red. However, the bears are arguably too negative, with 40% of the company's float being shorted as of Jan. 25. Therefore, any improvements under Soltau could spark a big short squeeze and attract value-seeking investors again.
Don't give up on this big bank
Dan Caplinger (Wells Fargo): It's not hard to understand why Wall Street is no longer terribly interested in Wells Fargo as a stock. Despite the size of the massive banking institution, Wells Fargo has found itself at the center of so many controversial situations in the past several years that its reputation seems irretrievably damaged.
News in 2016 that employees had opened millions of fake accounts covering both bank and credit card relationships did a lot of damage, especially in light of the revelation of the pressure that bank workers were under to achieve sales goals. Further scandals involved unpopular situations such as repossessing vehicles owned by members of the military and improperly charging customers for unnecessary services such as auto insurance and extended rate lock protection on mortgages. Most recently, a huge failure in Wells Fargo's customer systems prevented millions of customers from accessing their bank accounts.
In response, the Federal Reserve felt it had no choice but to impose unprecedented growth restrictions on Wells Fargo, preventing the bank from adding to its asset base beyond existing levels. At a time when other banks are working hard to expand deposit and loan levels, the restrictions leave Wells Fargo on the outside looking in.
Wells Fargo stock has been stagnant for a long time, and investors seem convinced the bad times will last forever. But at some point, Wells will start behaving the same way as its peers. When that happens, the share price should have some catching up to do -- and Wall Street's lack of confidence in the bank will seem like a big mistake.
This stock suddenly looks pretty attractive
Maxx Chatsko (Calavo Growers): The avocado-toast trend may have come and gone, but Calavo Growers is well positioned for the long haul. Wall Street soured on the specialty fruit and packaged foods company after it ended fiscal 2018 with a dud. The formerly fast-growing business limped to year-over-year revenue growth of just 1.2%, while gross profit and net income slipped compared with fiscal 2017. It had previously grown year-over-year revenue at roughly double-digit clips since at least 2014.
The disappointing results caused shares of the avocado grower to plummet from $100 apiece to just $67 in a few days. That's not too surprising, considering Calavo Growers was trading at a healthy premium because of its epic growth performance over the years. But now, even after shares have recovered to $77, the stock looks pretty attractive. Before the plunge, shares typically traded at 35 times future earnings and a PEG ratio of 1.1. Right now they're at 25 times expected earnings and a PEG ratio of just 0.38.
Even better, investors who take a closer look at the business might find it difficult for the tough circumstances of 2018 to be repeated. Calavo Growers suffered from food recalls, including one from a supplier, and falling selling prices of avocados. (Prices have since lifted off their lows.) The biggest hit may have come from a $12 million non-cash equity loss stemming from its investment in meal-kit start-up FreshRealm. That was a significant blow, considering the company reported net income of just $32 million.
While Calavo Growers expects to record additional losses from FreshRealm in fiscal 2019, it's confident in the long-term potential of linking its packaged-foods brands with the meal-kit provider. CEO Lee Cole isn't fazed. In fact, he told investors to expect record revenue and double-digit growth in adjusted earnings per share (EPS) for the year. Delivering on that expectation would put the company back on its growth trajectory -- and make the stock even cheaper in the near future.
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Dan Caplinger has no position in any of the stocks mentioned. Leo Sun has no position in any of the stocks mentioned. Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.