This Just In: More Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Today, we're going to take a look at three headline-making ratings moves on Wall Street: Downgrades for Amgen (NAS: AMGN) and Cisco (NAS: CSCO) , balanced by a curious upgrade for Apollo Investment (NAS: AINV) . Let's dive right in.

Amgen's looking sickly
Amgen investors were crushed to learn yesterday that the U.S. Food and Drug Administration had voted 12-to-1 against expanding use of the firm's Xgeva cancer drug to combat bone cancer. This news was propitious for Dendreon's (NAS: DNDN) rival Provenge treatment, according to an analyst at Canaccord Genuity. As for Amgen, BMO Capital Markets commented that the FDA ruling could cost Amgen as much as $1 billion in potential revenues -- as much as one-third of the drug's potential market. This morning, Oppenheimer seconded that emotion, withdrawing its "outperform" rating on Amgen and downgrading the stock to "perform." (Read: "hold.")

I agree. I've backed Amgen before -- I encouraged investors to buy it back in December and that turned out to be good advice -- but with the stock up 18% from where it was when I recommended it, the easy money has already been made here. With a P/E of more than 16, but long-term growth projected in only the high single digits, I suspect there are better places to put your money today.

Cisco's superb... so sell it?
As bad as Amgen's news was yesterday, Cisco's was superb. Management announced fiscal Q2 2012 earnings that were up 44% year over year, and on respectable revenue growth of 11%. Sales of routers were up 8%. Switches 8%, too.

That's not keeping the wolves at bay, however. This morning, two of Wall Street's best and brightest -- ISI Group and MKM Partners -- agreed that Cisco's results merit a downgrade to "hold" (or the equivalent neutral rating). The stock's near-18 P/E ratio, when combined with long-term expectations for just 8.5% annual profits growth, mean a lot of optimism has already been priced into the stock. But according to ISI, while Cisco certainly did well in Q2, all the results really show is that the company's "back where it should be."

I'd like to argue with that, but I can't. Vastly overpriced from a P/E perspective, even looking at Cisco from a price-to-free-cash-flow bent, I don't see much reason to pay more than 10 times FCF for a single-digit grower. The stock's done well for me in the past, but based on this week's results -- and this week's stock price -- I see no urgent need to put Cisco back in the portfolio today.

Apollo: After the flame-out
It's been a rough week for business development companies like Apollo Investment. A few days ago, if you recall, rival BDC MCG Capital (NAS: MCGC) tanked when ace stock picker Stifel Nicolaus turned against it. Yesterday, we got a clue as to why Stifel had turned suddenly pessimistic, when Apollo itself reported earnings that actually weren't half-bad but then turned around and spooked the market with a plan to raise $200 million in additional capital.

Shares fell 15% in response to the news, but according to investment banker Ladenburg Thurman, that was an overreaction. Sure, no one likes to see their investment in a company diluted by an equity issuance -- and Apollo's plan promises a potential 14% dilution of shareholders' stakes in the company. But if Apollo can put the new capital to good use, there's no reason to think the company's value won't increase by $200 million (or more). In other words, shareholders could wind up with smaller slices of a bigger pie.

Foolish takeaway
I'm not ordinarily a fan of BDCs. But with Apollo selling for less than eight times forward earnings, pegged for 5% long-term profits growth, and paying a 14% dividend yield, I'm not convinced this is as bad a deal as everyone out there in investor-land seems to think it is.

Whose advice should you take -- mine, or that of "professional" analysts like Oppenheimer, ISI, and Stifel? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

And if you're looking for more profitable investing ideas in the world of high finance, read the Fool's new -- and free -- report on the industry:The Stocks Only the Smartest Investors Are Buying.

At the time this article was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.He does, however, have public recommendations available on 52 separate companies. Check them out on Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and iscurrently ranked No. 385 out of more than 180,000 CAPS members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Dendreon and Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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