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: An upgrade for Micron (NAS: MU) , a downgrade for Kopin (NAS: KOPN) , and a slap in the face for EMC (NYS: EMC) .

Micron's making moves
Let's start with the good news. Citing "consolidation" in the DRAM industry, Bernstein this morning upgraded shares of Micron Technology to "outperform." Micron, says Bernstein, is going to be one of just three big survivors in the DRAM market as rivals "die or are acquired." Eventually, the analyst expects to see Micron shares priced on their book value, rising from today's book-value multiple of 1 and perhaps even approaching the 1.9 times multiple of Korean rival Hynix. Taking a middle-of-the-road approach, Bernstein posits a 1.5 times book valuation for Micron, suggesting 50% upside to the stock.

This makes sense if investors agree to play ball and price Micron on its book. But what if they choose a more traditional valuation scheme, valuing the shares on the profits they produce or (heaven forbid) the free cash flow that they don't produce? Unprofitable today, and trading for 16 times next year's projected earnings, Micron looks pricey relative to consensus projections of 11% long-term growth. With free cash flow currently negative, there's little hope there, too.

I like Micron as a company -- don't get me wrong. But before I put real cash into the stock, I'll want to see proof that Micron can generate some cash of its own.

Kopin defenseless
Further on in the semiconductor sphere, we find Needham & Co. downgrading Kopin to "hold" this morning. The continuing popularity of smartphones is helping Kopin's III-V semiconductor business to chug along nicely, notes Needham. The problem here is Kopin's defense department business. Pentagon spending is down (perhaps you've heard?), and that's a big part of the reason Kopin just cut its 2012 revenue guidance to between $110 million and $120 million, which makes for a decline in sales year over year.

Consensus projections call for Kopin to earn $0.14 a share this year, but Needham warns that Kopin could actually lose a penny per share instead. If Needham is right, then that would be a big disappointment for any investors relying on Wall Street projections -- and could spark a sell-off in the shares. Given this, I'd go a step further than Needham. If you think the analyst is right and a loss is in the offing, now's not a time to "hold" the shares at all. It's time to sell.

EMC: No longer "convincing"?
Last, and far from least, our friends at StreetInsider.com inform us that Goldman Sachs removed its coveted "conviction buy" rating from EMC this morning: "While we continue to believe that the company will post upside in coming quarters, the stock's recent run no longer justifies Conviction List positioning."

Goldman still thinks the stock's a buy, mind you. Indeed, at the same time it ramped down its enthusiasm for EMC, Goldman upped its price target on the stock to $33. Problem is, the prospect of a 13% profit (from today's price) just isn't a big enough pile of gold to attract Goldman anymore. EMC shares are up 25% since I made my CAPScall, publicly recommending EMC back in December. But unlike Goldman, I'm still bullish on the shares.

Trading for 12.2 times free cash flow, but with long-term growth projected at 15.5%, EMC shares still look like a bargain to me. And yes, I still like EMC better than subsidiary VMware (NYS: VMW) , which, while growing faster than EMC at a rate of 24%, is priced at twice what EMC shares fetch (25 times FCF). Goldman's reservations notwithstanding, I'll take an undervalued stock over a fairly valued stock any day of the week -- and, if the market were open, twice on Sundays.

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

At the time this article was published The Motley Fool owns shares of EMC.Motley Fool newsletter serviceshave recommended buying shares of VMware. Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.He does, however, have public recommendations available on more than 50 separate companies. Check them out on Motley Fool CAPS, where he goes by the handleTMFDitty -- and iscurrently ranked No. 378 out of more than 180,000 CAPS members. 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.

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

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