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 high-profile ratings moves on Wall Street: new upgrades for energy plays Chesapeake (NYS: CHK) and Suncor (NYS: SU) , and a step down for Crocs (NAS: CROX) . Let's dive right in.

Crocs crumbles
Plastic-clog czar Crocs announced this morning that it will be releasing Q4 earnings data after market close Thursday, Feb. 23. At least one analyst isn't waiting around to hear the other shoe drop. While calling the shares "attractive at 15X estimates for next year," Standpoint Research expressed some skepticism about those estimates themselves.

On Wall Street, the consensus is that Crocs next week will guide to 18% revenue growth and 17% earnings growth for the current year. If it does so, this will make Crocs one of the faster-growing companies in the "footwear & accessories" industry. But after running up 30% in price since October, it's also selling at a premium to the average P/E in the industry. So, warning that "good news" on next week's earnings is already priced in at Crocs, Standpoint downgraded the shares to "hold."

I agree. With free cash flow continuing to lag reported net income, the best I can say about Crocs is that it might be fairly priced at today's 24 times FCF valuation (versus 25% projected long-term growth). If Standpoint's worries prove correct, though, and Crocs fails to deliver all the growth that's been "priced in" to the stock, look out below. In Crocs' case, I think it's better to be safe than sorry, and better to hold than to buy.

Flood warning: Chesapeake rising
In happier news, investors at natural gas producer Chesapeake Energy received an upgrade to buy this morning, courtesy of Stifel Nicolaus. Thanks in part to production cuts at Chesapeake, U.S. natural gas futures jumped 6% in a single day today. Also supporting the stock is news that rival EnCana (NYS: ECA) announced a plan to reduce its own production of gas by as much as 600 million cubic feet per day. Meanwhile, in macroeconomic news, the government released new data showing natural gas reserves falling further than previously expected, even as a cold front begins to spread across the U.S., which could produce lower temperatures (and higher gas demand) over the next couple of weeks.

It sounds like good news for Chesapeake, but I wouldn't back up the truck just yet. At 12 times earnings, and only 11% projected long-term growth, this is hardly a "value stock." There's also Chesapeake's monster $11.7 billion net debt to consider. The fact that the company still hasn't managed to generate actual free cash flow from its business gives added reason for concern (it was last positive on this metric in 2006).

Suncor: Burning bright
Stifel's other upgrade of the morning offers more reason to be optimistic. Upgrading shares of Suncor Energy to buy, Stifel pointed to the firm's positive free cash flow as a factor in the stock's favor. Transforming oil sands into black gold is a terribly capital-intensive process. Even so, over the past 12 months, this oil sands operator managed to generate positive free cash flow of $3.1 billion. After four years of negative FCF, that's quite an improvement.

Suncor's superior to Chesapeake in other respects as well. Its P/E ratio of 13 may look slightly more expensive. But analysts expect Suncor to grow much faster than Chesapeake, justifying the higher P/E. On average, the consensus of analysts is that Suncor will post earnings growth north of 20% per year for the next five years. That's fast enough to make the stock look cheap when valued on free cash flow or earnings.

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

And don't miss your chance to pick up a free copy of our new report on oil industry bargains: "3 Stocks for $100 Oil." It's free for today, but it won't be forever.

At the time this article was published Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy, but Fool contributorRich Smithdoes not own shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 380 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Foolhas adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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