Why Argan Stock Tumbled by 4% on Tuesday

Construction and engineering company Argan (NYSE: AGX) stumbled on the stock market Tuesday. Following news of an analyst's recommendation downgrade, investors sold out of the stock to leave it with a 4% decline over the trading session. That was a worse performance than that of the bellwether S&P 500 index, which eked out a marginal gain of less than 0.1%.

Approaching overvalued territory?

The pundit responsible for the downgrade was Lake Street Capital Markets' Rob Brown, who changed his Argan recommendation to hold from the previous buy. Despite the change, Brown actually boosted his price target on the construction company's stock to $150 per share from $85.

According to reports, the analyst believes that Argan's equity -- which has seen quite a run-up since the summer and has gained a whopping 220% in price year to date -- is now fairly valued. This company is benefiting from strong demand for power solutions in hot technologies such as electric vehicles and data centers.

Brown added that the company should secure numerous large contracts in such fields, and these victories will drive meaningful growth in revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA).

No rally lasts forever

While any stock facing juicy growth opportunities presents an attractive buying opportunity for investors, valuations always matter. In Argan's case, since its potential is so clear, scores of market players have already jumped in to take advantage of this. It's looking pricey on several key metrics, including price-to-sales at a ratio of almost 3 and a price-to-book value of 6.8.

This isn't to say that it can't still go notably higher. However, buyers should always beware in situations where a stock is on a long bull run.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.