Hot Stocks: Despite Lowered Target, Vale Still Poses Potential 59% Gain, Analyst Says

[“Hot Stocks” is a new Money Morning feature that analyzes the investment outlook of global companies that are in the news. This is the sixth installment of this ongoing investment series.]

Money Morning Staff Reports

Riddle me this: When is it good news when an analyst slashes his price target for a stock by 55%?

Answer: When that “reduced” target price still represents a 59% gain.

That’s precisely the scenario facing Companhia Vale do Rio Doce (ADR: RIO), the world's biggest iron-ore producer. Felipe Reis, an analyst for Banco Santander SA (ADR: STD), yesterday (Monday) slashed his target price for the U.S.-listed shares by more than half, stating that the worldwide outlook has become “more challenging.”

Reis, who previously had placed a year-end 2009 price target of $40 a share Vale’s U.S.-listed American Depository Receipts (ADRs), now says the shares of the Rio De Janeiro-based mining-and-metals heavyweight will trade at $18 at next year’s close. If you’re keeping score, that’s a reduction of 55% from his prior target.

But it still represents a 59% gain from yesterday’s closing price of $11.32 a share.

”We are adjusting our estimates for Vale in order to reflect the more challenging scenario in the commodities market,” Reis wrote in a research missive, noting that the reduced target price takes into account “the significant global economic slowdown.”

In related news yesterday, Merrill Lynch & Co. Inc. (MER) cut its 2009 economic-growth forecast for Brazil to 2.9%, from a previous estimate of 3.1%, as the lagging effect of scarcer credit may be deeper than thought.

The Brazil exchange-traded fund, theiShares MSCI Brazil Index (NYSE: EWZ), was the focus of a recent Money MorningBuy, Sell or Hold” column, and soared as much as 42% in six days after it was recommended as a “Buy.”

Money Morning Contributing Editor Martin Hutchinson also recently wrote favorably about the long-term prospects of the Brazil economy as a “safe haven” market that U.S. investors should consider.

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