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Why, Inc. Slipped Today

By Brian D. Pacampara, CFA – Feb 11, 2014 at 1:07PM

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Does this analyst make a good case or is it just more noise from Wall Street?

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

What: Shares of Chinese online media company, Inc. (SOHU 0.50%) fell 2% today after its weak Q1 guidance prompted a downgrade -- equal-weight to underweight -- from Morgan Stanley.

So what: Along with the downgrade, analyst Philip Wan lowered his price target to $57.60 (from $60.70), representing about 19% worth of downside to yesterday's close. While contrarians might be attracted to Sohu's share-price weakness in recent months, Wan thinks there's more room to fall given the margin-pressuring headwinds continuing to work against it.

Now what: According to Morgan, Sohu's risk/reward trade-off isn't too appealing at this point. "Despite solid performance from brand ads and Sogou, heavier investments in Changyou (online gaming) result in a softer 2014 margin outlook," noted Wan. "Competition remains intense for its online video and search businesses. Move to UW due to low visibility on near-term margin with a new PT of US$57.6 per share." With Sohu now off more than 20% from its 52-week highs, however, patient growth investors might want to use that short-term uncertainty to build a long-term position.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned Stock Quote
$15.12 (0.50%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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