The stocks in this article have caught Wall Street’s attention in a big way, with price targets implying returns above 20%. But investors should take these forecasts with a grain of salt because analysts typically say nice things about companies so their firms can win business in other product lines like M&A advisory.
Luckily for you, we at StockStory have no conflicts of interest - our sole job is to help you find genuinely promising companies. That said, here are three stocks where Wall Street may be overlooking some important risks and some alternatives with better fundamentals.
Portillo's (PTLO)
Consensus Price Target: $8.15 (72.5% implied return)
Begun as a Chicago hot dog stand in 1963, Portillo’s (NASDAQ:PTLO) is a casual restaurant chain that serves Chicago-style hot dogs and beef sandwiches as well as fries and shakes.
Why Do We Steer Clear of PTLO?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Lacking free cash flow margin got worse over the last year as its investment needs accelerated
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Portillo's is trading at $4.73 per share, or 24x forward P/E. To fully understand why you should be careful with PTLO, check out our full research report (it’s free for active Edge members).
Transcat (TRNS)
Consensus Price Target: $103.67 (79.9% implied return)
Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ:TRNS) provides measurement instruments and supplies.
Why Does TRNS Give Us Pause?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 2.5 percentage points
- Issuance of new shares over the last two years caused its earnings per share growth of 2.7% to lag its revenue gains
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $57.63 per share, Transcat trades at 28.9x forward P/E. Read our free research report to see why you should think twice about including TRNS in your portfolio.
Supernus Pharmaceuticals (SUPN)
Consensus Price Target: $61.33 (19.6% implied return)
With a diverse portfolio of eight FDA-approved medications targeting neurological conditions, Supernus Pharmaceuticals (NASDAQ:SUPN) develops and markets treatments for central nervous system disorders including epilepsy, ADHD, Parkinson's disease, and migraine.
Why Do We Pass on SUPN?
- 5.9% annual revenue growth over the last five years was slower than its healthcare peers
- Revenue base of $681.5 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
Supernus Pharmaceuticals’s stock price of $51.28 implies a valuation ratio of 20x forward P/E. Check out our free in-depth research report to learn more about why SUPN doesn’t pass our bar.
High-Quality Stocks for All Market Conditions
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