If there has to be an out-of-favour UK large cap stock of the year, its got to be Morrisons(LSE: MRW)(NASDAQOTH: MRWSY.US). Since this time last year, the stock has shed 40% of its value. Partly as a result, its received a spate of downgrades by analysts.
The latest of those downgrades came on Friday, when BNP Paribas reiterated its underperform rating on the stock, maintaining a price target of 150p per share, the lowest yet. On Thursday, Grupo Santander re-rated the supermarket chain as underweight, putting a price target of 170p a share on the company. That followed another downgrade of Morrisons on Wednesday by Jeffries & Co., where analysts cut their price target by 10% on the company to 225p per share. Analysts at Sanford C. Bernstein reiterated their market perform rating the Friday before, on August 29th, maintaining a lacklustre price target of 180p a share.
The unremarkable expectations by analysts for the near-term performance of the discount supermarket retailer chime with the opinions of the majority of my Foolish colleagues, to be sure. I admit that am not a fan of business models centered on discount pricing: when cost is the only variable you have to lose, so are your profits, eventually. But that doesnt mean such a huge reduction in the share price of Morrisons is justified right now.
Management Efforts Count, Too
The diminished valuation for Morrisons ignores steps that the companys management has taken to restore future value.
For a start, theres the massive 1,200-product price slashing initiative the company implemented in May. Thats a considerable range of products, and there are signs it helped the supermarket chains core customers most of whom are bottom-feeders when it comes to bargain hunting to come back. But thats not all. The company has invested in both its e-tail business model and its convenience stores, as well as a loyalty programme thatwill enable it to retain some of its customers in ways that it wasnt able to before its latest woes set in about a year ago.
In other words, unlike most companies that hit a hard patch, it appears that Morrisons managers understand what is afflicting sales and are actively working to restore the problems.
Picking Up The Shortfall
But theres yet another indication that Morrisons is bearing injuries that are not so much to do with its own poor performance so much as they are to do with the sector as a whole: all other competitors are performing badly, too. Discount supermarket chain Tesco has dropped 38% in the last year, while even Sainsburys, a more upscale rival, is off 25% both despite showing profits.
As a result, the percentage of shares of these companies used for stock-lending activity has spiked since the start of the year, indicating short-selling has driven the value of the stock lower. If managers at Morrisons can fix whats wrong with the company while market conditions normalise, then this stock could come belting back fast as many short-sellers are forced to buy the stock back, compounding gains.
Getting on the right side of market trends — and, conversely, avoiding getting caught out on the wrong side of them — is what underlies producing outsize gains on an investment portfolio. It’s how buyers of Morrisons today could be bearers of significant investment returnstomorrow.
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Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.