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Equity Analysts Upgrading in Face of Macro Crisis

Wednesday, 26 May 2010 | 1:32 PM ET

Brave individual company analysts are upgrading stocks in their coverage that have been beaten down by macroeconomic worries, which have the total stock market quaking in fear, but have yet to show up in their microeconomic analysis.

“As of this point in the quarter we know of no reason to change any of our estimates,” wrote Chris Kotowski, Oppenheimer banking analyst, in a note to clients today upgrading Citigroup. “All that is changed is that the stock price is down 15 percent.”

Kotowski, capturing the sentiment of many analysts out there perfectly, upgraded Citigroup to ‘outperform’ from ‘perform’ citing valuation, improving credit quality and growth in Asia and Latin America.

Citigroup shares climbed more than 3 percent today as US stocks continued their rebound from a correction that had taken the S&P 500 down almost as much as 15 percent from its 2010 high. Alcoa also added to gains after a Macquarie analyst recommended buying the name on improving global demand for aluminum.

“We’ve heard the European economy could actually be helped by the falling euro , which would be a boon to their exporters,” said Curt Woodworth from Macquarie. “Alcoa shares are extremely undervalued in our view,” he said, citing the 12 percent drop in aluminum since January, but the much bigger 35 percent loss in Alcoa shares.

Some investors are worried that the individual analysts have not accounted for the global slowdown that has yet to show up in companies’ results, but the stock market is telegraphing right now. Using collective analyst earnings estimates on companies in the S&P 500 puts the market at seemingly cheap forward P/E of about 13, according to Thomson Reuters. Maybe that’s too cheap.

“The analysts are right to upgrade right now,” said Tim Seymour, founder of EmergingMoney.com and a ‘Fast Money’ trader. “All the data coming out is fine.” Seymour, who runs a hedge fund specializing in emerging markets, is nibbling at global miner Rio Tinto . Its shares are down 25 percent in the last one month.

In many cases, analysts that use overblown macroeconomic concerns to upgrade their stocks make the best calls. The winners in the Wall Street Journal’s annual analyst survey, released yesterday, were those who upgraded stocks near the bottom of the bear market in March 2009.

“The value or value-trap debate will be answered by the direction or pace of the economic recovery,” wrote Citigroup’s mining analyst Brian Yu, who upgraded AK Steel and recommended buying Freeport-McMoRan yesterday morning, when futures were pointing to a triple-digit Dow decline. “We believe metals stocks offer good value here under tempered expectations, given recent declines.”

For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC.

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Trader disclosure: On May 26, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova owns (AXP), (BBY), (BMO), (BTU), (DIS), (FTO), (GLD), (IPSU), (OIH), (PFE), (RSX), (STLD), (SWN), (TER), (XCO), (YHOO) Kelly Owns (FCX) Calls; Kelly Owns (CLF) Calls; Finerman Owns (AAPL); Finerman's Firm Owns (BAC), (BAC) Calls; Finerman Owns (BAC), (BAC) Preferred; Finerman Owns (GOOG); Finerman Owns (GS) Calls; Finerman's Firm And Finerman Own (HPQ); Finerman's Firm Owns (JPM), (J)PM) Calls; Finerman Owns (JPM); Finerman's Firm And Finerman Own (RIG), (RIG) Calls; Finerman's Firm Owns (KFT); Finerman's Firm Is Short (IJR), (MDY), (SPY), (IWM); Finerman's Firm Owns (PM); Jon Najarian Owns (BAC); Jon Najarian Owns (BP); Jon Najarian Is Short (MCO); Jon Najarian Owns (C); Seymour Owns (BAC), (AAPL), (GOOG), (VIP

For Tim Seymour
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For Joe Terranova
Terranova Works For (VRTS)
Terranova Is Chief Market Strategist Of Virtus Investment Partners, Ltd.
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For Brian Kelly
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Kanundrum Capital owns (LIFE)
Kanundrum Capital owns (CXW)
Kanundrum Capital owns (FCX)
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Kanundrum Capital is short Euro
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Hintz Owns Morgan Stanley And Discover
Hintz Owns (CME)
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FCX
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