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The Ratings Game: Buy UPS stock, analyst says, as time to be bullish is when sentiment is negative

Shares of United Parcel Service Inc. rallied Tuesday after analyst Amit Mehrotra at Deutsche Bank recommended investors buy, saying that concerns that a slowing economy and labor negotiations would weigh on the package-delivery giant have already been fully priced in.

Basically, Mehrotra is taking a contrarian view, saying investors’ worries can actually provide a reason to be bullish. He raised his rating on UPS back to buy after downgrading it to hold exactly one year ago.

He also raised his stock-price target to $220 from $197, with the new target implying about 19% upside from current levels.

“It’s easy to be neutral or negative on UPS in the current environment, but in our experience that’s exactly the time to get more positive, especially under the stewardship of the current management team,” Mehrotra wrote in a note to clients.

Shares of UPS

climbed 2.8% to $184.89, the highest close since Sept. 15. It has now run up 16.2% since closing at a 21-month low of $159.14 on Oct. 7.

Mehrotra said he believes Wall Street is “overly” focused on volume growth, rather than on mix and productivity initiatives that can drive revenue growth and solid margins in the near term. And over the medium term, he believes the upcoming negotiation with the Teamsters union will be more benign than investors seem to expect.

He bases his confidence in the management team on the fact that over the past three quarters, the company has managed to improve margins despite declining volumes and rising costs.

Mehrotra’s downgrade of UPS a year ago came after the stock had more than doubled off the March 2020 low, as investors viewed the company as a major beneficiary of the postpandemic surge in e-commerce. But at that time, he had become worried about changing macroeconomic conditions and upcoming labor negotiations.

“While contrarian at the time, we believe those concerns are now fully reflected in the shares and widely held by market participants,” Mehrotra wrote in his note.

The stock has lost 6.8% over the past year, while the Dow Jones Transportation Average

has shed 9.3% and the Dow Jones Industrial Average

has slipped 1.8%.

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