Key Points
- Devon Energy produces solid cash flow and pays a variable dividend worth nearly 7% in 2023.
- Nike's end markets are on the brink of inventory normalization; growth should return soon.
- Home Depot is best positioned for a home improvement boom forecasted to begin this year.
- 5 stocks we like better than Home Depot
A downgrade isn't necessarily bad, just like an upgrade isn't always a reason to buy.
Sometimes, downgrades or downward revisions to price targets are a natural and healthy part of market mechanics. In that scenario, a trimmed target may impact the price action today but set up a buying opportunity for tomorrow, which is the case with Home Depot NYSE: HD, Nike Inc. NYSE: NKE and Devon Energy Corp. NYSE: DVN. All three names appear on MarketBeat's list of most downgraded stocks but share some qualities and characteristics that make them stand out as long-term winners.
The first is that all three names command a "moderate buy" rating despite the negative analyst activity. In one case, the "moderate buy" is up compared to last year, and there is an opportunity for capital gains with each. Additionally, all are solid dividend payers with an outlook for distribution growth and have secular tailwinds to sustain business long-term.
Devon Energy beaten down and underappreciated
Devon Energy is an independent energy operator in the U.S. with assets in all major producing regions. The stock has been beaten severely over the past year due to the decline in oil prices and demand outlook. The stock tops this list with 51 negative or bearish revisions in 2023, including a 30% decline in the MarketBeat.com consensus price target. The downward action in the price target is part of why the stock price has seen such a downtrend, but the market for the stock has overrun reality.
Analysts rate this stock at "moderate buy" due to its cash flow and capital returns. They lowered their price targets but, trading at $41.50, the stock is well below the low end of the range, about 15%. It presents a deep-value opportunity compounded by the dividend. The dividend yield isn't great at face value, only 1.9% after the stock price implosion, but that is the base payment. Devon also pays a variable special dividend as it can; the trailing twelve-month yield in early January 2024 is near 6.8%, and the outlook for 2024 is solid.
Devon Energy analysts expect revenue to drop slightly compared to 2023 but for the margin to widen. The company's margin is widening due to increased output and efficiency; free cash flow doubled in CQ3.
Nike analysts raised ratings in 2023
Nike is prominently listed among the stocks with negative revisions, boasting 39 in 2023. However, the activity in 2023 was more mixed than not, resulting in an upward drift in sentiment that helped the stock price to bottom. The Marketbeat.com consensus sentiment for Nike improved from "hold" to "moderate buy," but the price target edged lower, which is today's hurdle. That trend may keep Nike's stock price range bound in the year's first half, but the 3% decline is tepid, and the $123.50 target is about 20% upside for new investors. All the market needs are catalysts, and one is expected this year.
Nike struggled some in 2023, with growth slowing and falling short of expectations. Among the causes of weakness was an inventory reset that is nearing completion. Weakness should persist into the current quarter, but a trough is in sight, and growth is forecasted to return by the end of the year. In the next fiscal year, top-line growth should hit the mid-to-high single-digit range, and margins should expand.
Nike's dividend yield is near 1.4% and at the high end of the ten-year range, with shares near a multi-year low. Distribution growth will continue this year, and share repurchases will compound it. Nike share repurchases more than double the effective yield and should continue in 2024. The diluted share count was down 2.5% at the end of last quarter.
Home Depot to benefit from FOMC rate cuts
Home Depot also scored 39 negative revisions in 2023, but there is a significant shift in the sentiment today. Home Depot analysts issued three revisions in the year’s first week, and all are upgrades from Neutral-equivalents to Outperform equivalent. The consensus price target lags the price action, but the three upgrades include revisions to above-consensus price points, leading the market higher.
Analysts from Piper Sandler see Home Depot as the better-positioned retailer to capture home improvement spending in 2024. Its lean into the pro-industry has it set up to win larger projects as homeowners lean into HELOCs now that rates have peaked and may retreat. Revenue growth should return as soon as the current quarter and help stabilize the capital return outlook. Home Depot's dividend is reliably safe at 55% of earnings; share repurchases are the question. Repurchases were solid in 2023 but may slow in 2024.
Before you consider Home Depot, you'll want to hear this.
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