Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Could the worst be over for Copa Holdings (NYSE:CPA)?

One analyst believes it may be. Over the past 52 weeks, investors in the parent company of Copa Airlines have suffered staggering 43% losses on their investment. Adding insult to injury, the broader S&P 500 index of companies has marched steadily upward by 16% -- resulting in nearly 60 percentage points worth of stock market underperformance for Copa stock.

And yet, the silver lining to this very dark cloud of stock market underperformance is that Copa stock, selling for less than 10 times earnings today, could be priced to perform much better for investors in the months and quarters ahead.

Or at least that's what Buckingham Research believes.

Crew standing in front of a Copa Airlines plane

All aboard Copa Airlines stock? Image source: Copa Airlines.

Upgrading Copa Holdings

This morning, analysts at NYC-based Buckingham announced they're upgrading shares of Copa Holdings stock. Even as they cut their price target to $95 per share to account for foreign exchange risk and "slightly higher" capacity in the airline industry (and an earnings miss), Buckingham sees a lot to like in Copa stock, as it explains today in a note covered on TheFly.com. "Booking trends have reflected positively over each of the past 3 weeks," says Buckingham, "indicating demand and pricing are stabilizing," albeit "at lower levels."

Although I haven't personally seen these "past 3 weeks" reports, in August, Copa did publicly report that its load factor (basically, how full of passengers its planes are flying) for July was 88.3%, "0.7 percentage points higher than July 2017." So, while capacity is growing strongly as Copa puts more planes into service, "systemwide passenger traffic" growing even faster -- resulting in fuller planes.

The analyst also believes that Copa's "new revenue management system is poised to contribute to new ancillary revenue opportunities."

A price that's more than nice

All of these positive trends, of course, pale in comparison to the biggest point in Copa Holdings stock's favor: its price.

Falling from a high north of $141 a share in January to its yesterday-close near $76 a share, Copa stock has lost nearly half of its value since the year began. At today's market capitalization of $3.3 billion, Copa Holdings shares sell for a mere 8.4 times trailing earnings. And with free cash flow of $363 million backing up each reported dollar of "accounting profit" with more than $0.98 in real cash profit, Copa's nearly as cheap when valued on its free cash flow as it is when valued on GAAP earnings.

Reviewing the quarter

So, why is Copa Holdings stock so cheap? Last month, Copa "missed earnings" when it reported $1.18 per share in profit -- a dime short of Wall Street's hoped-for $1.28 per share. Sales declined 10% year over year, and profits were down 15% in the quarter -- mostly because of higher fuel costs.

This negative trend in earnings, when combined with what I believe are investor worries over continued economic turmoil in South America and concerns over currency devaluation in certain Latin American countries, probably explains most of Copa Holdings' stock decline. That's a perfectly valid concern. After all, according to data from S&P Global Market Intelligence, Copa depends on Central and South America and the Caribbean to supply more than 76% of its revenues. 

And yet, South America's economy is bound to turn back up eventually, and oil prices -- although they haven't given back much of their gains from earlier this year -- at least appear to have plateaued as of late, which suggests that much of the pain Copa shareholders have been enduring could be nearing an end. Plus, with Copa shares "23% off a recent high," as Buckingham points out, the now-cheaper shares "largely discount earnings risk."

The upshot for investors

In the face of bad economic news, airline analysts have tempered their expectations for Copa's growth and now project a very modest annualized earnings growth rate of just 9% for the company over the next five years. At a share price of less than 9 times earnings, I think Copa shares are more than fairly priced for that growth prospect -- even more so when you consider that Copa stock also pays an above-market 4.6% dividend.

If the economies in its most important markets should improve faster than expected, and should Copa grow faster than expected as a result, this stock could be downright cheap right now. Buckingham is right to recommend buying Copa Holdings stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.