Wall Street Hates These 2 Stocks. But Should Investors?

Predictions, upgrades, and downgrades are a dime a dozen from Wall Street. Sometimes the experts get it right, many times they don't. Because the market has a bad habit of overreacting, savvy investors can find undervalued stocks at a fraction of their value when good businesses are hit with a wave of bad news.

Let's take a look at two stocks Wall Street hates right now --TrueCar and Caterpillar-- to better understand whether the pessimism is warranted.

First up: TrueCar There's certainly been a wave of negative attention focused on TrueCar recently. Earlier this year, 117 new-car dealership franchises sued TrueCar for more than $250 million in total -- an amount nearly equal to the total revenue the company is expected to generate this year -- alleging that they are losing three to seven vehicle sales per month because of TrueCar's false advertising.

A second lawsuit followed later in 2015 when the California New Car Dealers Association claimed TrueCar is breaking state dealer licensing laws. While the merit of these lawsuits is questionable, it was the beginning of a bumpy ride for the company this year.

Then in mid-July, TrueCar and America's largest new-car retailer, AutoNation, could not agree to terms that would enable the former partners to continue doing business together. According to TrueCar, however, AutoNation represented only 4.2% of TrueCar's total units in the first quarter of 2015 and only 3.1% of its total revenue in the same quarter.

Then came the bombshell that sent TrueCar spiraling nearly 40% lower during one trading session.

On July 23,TrueCar held a preliminary results conference call in which management warned that its second-quarter loss could widen to as much as $15.5 million. Management also noted that total revenue for the full year would check in between $252 million and $258 million, down from the previous forecast of between $280 million and $290 million.

Then Wall Street put the icing on the cake for TrueCar's awful month. Goldman Sachs downgraded TrueCar to "neutral" and removed the California-based company from its "Americas Buy List," and even moved its price target down to $8 from the previous $17 mark.

From June 30to July 15,short interest in TrueCar jumped 10%, and when those figures are updated again, it'll probably show more investors betting TrueCar's stock will continue moving lower. It's definitely fair to say TrueCar is a stock that Wall Street hates, but should you?

The truth is that much of the negative noise around TrueCar and its lawsuits is irrelevant. The end of business between AutoNation and TrueCar hurts, but with the latter's dealership network still 10,000 strong, it's not as big of a deal as it's made out to be. TrueCar's users won't simply stop their vehicle-buying process because AutoNation dealers aren't an option -- they'll just take their business to another TrueCar dealer on the list when possible.

However, that doesn't mean TrueCar's struggles aren't real. The company needs to focus on improving its core product and website while improving the value its services offer consumers. This stock isn't for risk-averse investors or those with a short-term outlook. TrueCar's business isn't broken -- in fact, it still expects to post double-digit growth in total units for the second quarter -- but this is the beginning of a long journey, and many volatile trading days remain in its future.

Next up: Caterpillar Caterpillar's second quarter was a bit of a disappointment for investors, with revenue checking in about $2 billion lower than last year's second quarter and net income declining by 29%. Because of pricing weakness for copper, coal, and iron ore, sales of Caterpillar's trademark yellow digger and dump trucks have slumped. Lower oil and natural gas prices have also hindered demand for sales of Caterpillar's engines and generators to the energy industry.

Caterpillar's product floor. Image source: Caterpillar.

Across the company's entire global business front, there has been little to no improvement in recent years except for here in North America. That's made Caterpillar an easy target for analyst downgrades.

Recently, Caterpillar was downgraded by Vetr research analysts from a buy rating to a sell rating, with a price target of $69.72. Zacks lowered Caterpillar from a "strong-buy" rating to a hold rating in late July, while Tigress Financial slapped an "underperform" rating on Caterpillar in place of "neutral."

Caterpillar has been an easy target for Wall Street and bearish investors, while also tempting for value investors who are betting the company is well prepared for a rebound in commodity prices if and when that happens. Furthermore, Caterpillar's long-term investing thesis remains fine.

Caterpillar's competitive advantage is partially due to its extensive network of dealers which provide consumers the ability to maximize uptime on construction and mining equipment. The company is also focusing on improving its supply chain to reduce costs and push production risks to its suppliers -- something you can do when you're as big a company as Caterpillar, the largest construction and mining equipment manufacturer on the planet.

Wall Street's hate for TrueCar and Caterpillar is real, and it's warranted for the near term. Long-term investors, though, should watch for Caterpillar to rebound if commodity prices improve or the global economic outlook picks up the pace. TrueCar, on the other hand, needs to focus on improving its business funnel to complete more transactions between dealerships and consumers. If the company can accomplish this by providing more effective information and services, 2016 will be a much brighter year for the young company.

The article Wall Street Hates These 2 Stocks. But Should Investors? originally appeared on Fool.com.

Daniel Miller owns shares of TrueCar. The Motley Fool recommends TrueCar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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