Stock Analysis & Ideas

Billionaire Steve Cohen Dumps These 2 Stocks; Should You?

Investors are always on the lookout for signals to help make sound investment decisions, and one obvious path to follow is in the footsteps of Wall Street’s most successful stock pickers.

Ones such as hedge fund manager Steve Cohen. The billionaire has made his fortune using high-risk and high-reward trading strategies and currently runs hedge fund Point72 Asset Management, a firm which boasts $21.8 billion of assets under its wing.

But it’s not only the assets under his management which make Cohen a go-to source for investing advice. A successful investor will also know when the time is right to let go of any underperformers in the portfolio; recently Cohen has bid farewell to a pair of duds.

And it looks like he’s not alone in thinking these names are not worth investors’ time. According to the TipRanks database, it appears Wall Street’s cadre of experts aren’t too keen on these stocks, either. Let’s find out why.

Xerox (XRX)

First, we’ll zero in on Xerox, the famous printing company. Founded all the way back in 1906, Xerox is synonymous with the photocopier market. Nowadays, this Fortune 500 company provides print and digital document products and services in 160 countries. Xerox also offers graphic communications and production solutions, IT services, network infrastructure, and a host of managed IT solutions, such as technology product support, engineering services and robotic process automation for the commercial sector. 

Like so many others, Xerox has been affected by the twin scourges of inflation and supply chain woes and these played their part in the company’s Q2 performance. Sales dropped ~3% year-over-year to $1.75 billion, although they were up by ~1% on a constant currency basis. The macro conditions affected gross margins, which contracted by 370 basis points from the same period last year to 31.9%. On the bottom-line, adj. EPS of $0.13 beat the analysts’ forecast of $0.08 yet that figure was below 2Q21’s $0.47.

Evidently, Steve Cohen thinks it’s time to bail out. In Q2, Point72 sold out its position of 1,009,900 shares.

It’s a stance Credit Suisse’s Shannon Cross also takes, noting the dwindling returns in the post-pandemic office-light era.

“The pandemic significantly affected office print volumes, which we expect to recover to only 80% of 2019 levels before reverting to a low-single-digit decline,” Cross explained. “Around 80% of Xerox revenue is recurring (financing, supplies, services); therefore, contract renewals are key to slowing revenue declines (managed print contracts and leases are typically three to five years long). For contracts that are renewed, we expect customers to renegotiate terms to reflect lower usage and hardware requirements. For instance, corporations are placing more small A4 printers throughout offices, replacing what was historically one or two large A3 copiers per floor that require more comprehensive service contracts.”

Accordingly, Cross rates Xerox shares as Underperform (i.e. Sell) while her $14 price target suggests the stock will decline by 19% over the coming year. (To watch Cross’s track record, click here)

Looking at the consensus breakdown, the bears have it. Based on 3 Sells received in the last three months, the word on the Street is that XRX is a Strong Sell. The average target stands at $14, the same as Cross’s objective. (See Xerox stock forecast on TipRanks)

Gap (GPS)

Let’s now take a look at Gap, one of the world’s leading global retailers. The company specializes in apparel, although it also offers plenty of accessories and personal care products. Gap owns a collection of brands, which includes Banana Republic, Old Navy, and Athleta. The products are sold via stores owned by the company and online, as well as in franchise stores and catalogs. As of the end of last year, Gap boasted 2,835 company-operated stores and 564 franchise stores.

Almost every industry has felt the impact of the slowing global economy and Gap is no different. In the recently released Q2 report, revenue fell by ~8% year-over-year to $3.86 billion, although that figure was $40 million above Street expectations. Comparable sales dropped by 10% from the same period a year earlier, while online sales fell 6%. That said, the company managed to post a surprising profit, as adj. EPS of $0.08 came in $0.10 higher than the -$0.02 projected by the analysts.

However, citing the current CEO transition and the shaky macro climate, the company took its fiscal 2022 outlook off the table.

It’s clear Cohen thinks there’s too much uncertainty here; Point72 sold out its position of 592,585 shares during the second quarter.

Morgan Stanley’s Alex Straton notes the beats in the latest quarterly statement, but she does not think they are indicative of a meaningful change in the business’s fortunes. In fact, the analyst believes there are just too many negative indicators at play.

“GPS has no leader at the helm as of now, its jewel divisions Old Navy & Athleta aren’t performing, & inventory is bloated & will take time right-size,” she explained. “At the same time, while the lack of a 2022e EPS bar may temporarily alleviate some stock pressure, 2023e EPS estimates could be too high. As such, negative EPS revisions are possible and likely based on our analysis, which in our space is often met with stock declines.”

Based on all the above, Straton rates Gap as Underweight (i.e., Sell) and gives the shares an $8 price target. The figure suggests the stock will be changing hands for a 15% discount in a year’s time.

And what about the rest of the Street? 1 expert remains positive, 10 stay on the sidelines, but with 6 additional Sells, the analyst consensus rates this stock a Moderate Sell. According to the $9.27 average target, the current trading price is just about right. (See GPS stock forecast on TipRanks)

A look at the consensus breakdown does not inspire much confidence either. Gap stock’s Hold consensus rating is based on a single Buy vs. 10 Holds and 5 Sells. Over the next 12 months, shares are anticipated to stay range-bound, given the average price target stands at $9.47. (See GPS stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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