Why Gap Might Keep Plunging

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Gap (NYSE: GPS  ) slipped 1% today after BMO Capital Markets downgraded the teen apparel retailer from outperform to market perform.

So what: Along with the downgrade, analyst John Morris lowered his price target to $35 (from $50), representing about 5% worth of downside to yesterday's close. While contrarian investors might be attracted to the stock's steady plunge since early August, Morris believes that Gap's upside remains limited given the slow sales, high inventory levels, and heavy discounting that the sector is currently experiencing.

Now what: BMO thinks there's a good chance that industry softness in the third quarter will carry into the fourth. "We see many factors as driving this weakness, including the lack of a clear fashion consensus and an anemic macro backdrop," noted BMO. "Further, with Gap's design team in transition, mixed reviews on Fall and Holiday product from our channel checks, and enhanced marketing efforts, we believe struggling to drive higher traffic, we see risk to margins." With the stock now off more than 20% from its 52-week highs and trading at a forward P/E of 12, however, those short-term concerns might be providing patient Fools with a cheap long-term opportunity. 

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Related Tickers

9/28/2016 4:02 PM
GPS $22.06 Down -0.23 -1.03%
Gap CAPS Rating: **