Wave of Downgrades for “Overpriced” Stocks
I don’t usually put much weight in analysts’ upgrades or downgrades. Usually they’ll upgrade a stock to “outperform” and give a price of $x per share then sell at $X – 5. But I like to see why analysts are making the upgrade or downgrade, usually its due to earnings, but now it looks like analysts are downgrading on high stock prices.
Analysts See Cause for Concern
It is evident that analysts are now seeing cause for concern in the recent bull market. With many stocks up over 50% in less than 6 months, there seems to be reason to worry. The underlying fundamentals appear no stronger. Earnings are still way off their 2007 levels. But! Many investors are getting the feeling the black cloud is no longer hanging over WallStreet.
Buying Tomorrow, Today
Investors are surely more optimistic about the economy than they were just a few months ago, but much is on what is perceived to be a recovery rather than what actually is. Earnings are calculated year over year, so a huge bump this year means we’re just looking better than last year, which was pretty dismal to say the least.
Who’s Getting Downgraded
The majority of companies getting downgrades are 1: luxury product makers and 2: financial stocks. Both of which are equally worthy of a downgrade and as a whole have been the best performing assets on Wall Street since March 9. This goes back to the leveraged business effect, in which companies that are performing poorly can see a huge EPS increase due solely to the fact that a slight change in profit margin alters their earnings reports.
Keep Analysts in Check
The importance is why analysts are upgrading or downgrading stocks, not to what levels, or to what extent. Analysts can be excellent free resources, but often they operate as legal pump and dump schemes, where they get the public excited for high prices then sell as the bubble bursts. Think Goldman’s $200 oil call in 2008 
It is more than likely that there is more downgrades to come as world markets seem overbought around the globe. With valuations greatly exceeding the real intrinsic value of a many firms, China’s market experiencing a decent pullback, and the DJIA reaching some key technical levels of resistance, I would not take these downgrades lightly. Just perform your due diligence and well-rounded research on the stocks before deciding to sell, or take some money off the table, in the downgraded stocks.