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Stocks trading at deep discounts to their Wall Street price targets are likely red flags, trader warns

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Stocks trading below their Wall Street price targets may be red flags: Trader

There's price target tension in the market.

More than 370 stocks in the S&P 500 are double-digit percentages away from their average analyst price targets, teeing up a debate over whether it's time for Wall Street to revise its outlooks or for some of these stocks to play catch-up.

The stocks furthest away from their average price targets include: 

To some, including Mark Tepper, president and CEO of Strategic Wealth Partners, these stocks aren't meeting analyst expectations for a reason, he told CNBC's "Trading Nation" on Wednesday.

"Analyst price targets are almost always meaningless because they're always behind the curve. These price targets are probably before Covid-19, so, they obviously need to be adjusted. But when it comes to the analysts, what you should pay attention to is their thesis," Tepper said. "As an investor, you pay attention to their thesis and you come up with your own range of fair value. So, I went through the list of companies that are the farthest away from their price targets and, with the exception of Western Digital, they all just flat-out stink."

On a fundamental basis, most of the aforementioned companies are struggling in the new business environment, the investor said. 

Capri and Tapestry, the respective parent companies of Michael Kors and Coach, are "reliant on mall traffic, which is nonexistent," Tepper said. "They have a bunch of overstocked merchandise that's going to have to be heavily discounted just so they can move it. They have no cash flow and they're maxing out they're revolving lines of credit. So, that doesn't sound like a business I would want to own."

Fellow retailer Under Armour "is the turnaround story that everyone talks about as a turnaround, but it never turns around," he said.

"You've got Nike and Lulu which are just completely eating their lunch when it comes to direct to consumer, and that's where the industry's headed," he said. "And then you take a look at their product. Have you ever looked at their shoes? They literally make the ugliest shoes that the world has ever seen. ... That's my opinion, but they're also not growing that segment at all. There's no growth there, and I think for good reason."

Alliance Data, which makes private-label credit cards for brands like J. Crew, will also likely struggle as stores stay shuttered and consumers opt to pay off their more versatile credit cards first, Tepper said.

"GE's a complete dumpster fire, just way too much debt," he said. "They sold off their best business to pay down debt and now they're just left with a bunch of nothing. And the best business they currently have is aviation, and we know how bad that is."

Matt Maley, chief market strategist at Miller Tabak, said the technical charts look "as bad as the fundamental outlook" for GE.

"It's much closer to its March lows than its March highs," Maley said in the same "Trading Nation" interview, noting that its low is at "$6.11 on a closing basis."

If GE breaks below that low in a "meaningful" way — "in other words, if you break below $6" — the stock could undergo another painful round of selling, Maley warned. GE fell nearly 3% in early Thursday trading to $6.32.

"It's funny because a couple of years ago, I made one of my better calls saying that GE down at [$]6.66 was a great buy over an intermediate-term basis. That worked out very well. But this is a stock I would not buy on an intermediate, long-term or short-term basis," he said. "It just does not look good at all on the chart."

The one stock that Tepper and Maley agreed was the most attractive of the group was data play Western Digital.

"Not only did it make a nice higher low, but its higher high is a rather significant one, not just a minor one like we've seen in some of the others," Maley said.

"If it can rally again, move back above those highs above $45 — I think it was 45.30 — the stock is really going to get a lot momentum to the upside," Maley said. "And so, that's the one I would say, of all of them, that looks best on the charts."

Tepper, who owns shares of Western Digital, said it has the advantage of being in the "right industry" for the moment as millions work and learn from home.

"You're going to need more data center storage. You're going to need more information in the cloud. Western Digital really plays into that theme," Tepper said. "A $70 price target on that probably is a bit high, but it's probably a $60 stock and it's trading the 40s right now. They make the memory chips that go into smartphones. Everyone has a smartphone. They make the hard drives for those slim, more portable laptops that everyone wants to use, and obviously, they're a big player in the cloud as well. So, that'd be the one that I like here."

Western Digital shares fell almost 4% in early Thursday trading to $41.02.

Disclosure: Tepper owns shares of Western Digital.

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