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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.)

So 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 tech moves on Wall Street: a new and improved price target for Capital One (NYS: COF) , plus an upgrade for First Solar (NAS: FSLR) , and downgrades for IBM (NYS: IBM) ... and First Solar!


It's not wise to default on a Viking
The verdict is in: Capital One saw a 10% decline in delinquencies over the past month, and credit card balances, while down from Q4, are up over last year's Q1. This news had Nomura Securities singing Cap1's praises earlier this week and assigning a $54 price target to the buy-rated stock. This morning, the ace analysts at Stifel Nicolaus joined them. Already bullish on the shares, Stifel's raising of its price target on the stock to $71 -- an 18% increase -- suggests that this story is only going to get better.

And why shouldn't it? Already, the stock's priced for extremely pessimistic performance. Eight times earnings is simply too low a price to pay on a card company that analysts already expect to grow at nearly 9% per year going forward. If Stifel, and Nomura, are right that Cap1 will soon "get back on a trajectory for growth," then these shares are priced to move.

This is why I've publicly recommended Capital One in my Motley Fool CAPS account, and I'm sticking with that advice today.

First Solar flame-out?
When thin-film solar producer First Solar announced a plan to fire 2,000 employees and cut costs by as much as $120 million annually, investors cheered, and Wall Street's analysts were first among them. Well, some of the analysts, at least. And maybe not all the investors, either.

This morning, conflicting guidance is issuing from the Street, as Cantor Fitzgerald retracts its "sell" rating on First Solar and upgrades to "hold," while over at Wunderlich, they're taking the opposite approach -- downgrading from "hold" to "sell."

Who's right? Actually, Cantor's "bullish" recommendation may give us the best clue. According to StreetInsider.com, you see, the real reason Cantor is upgrading First Solar is that now that the company's thrown in the towel on growth, the "easy short call" is "done [as] ... prices have collapsed to levels below even our bearish estimates." Cantor argues that if any money's going to be made in this industry going forward, it will depend on "politics, M&A activity, and perhaps luck" -- which I think you'll agree is hardly a basis for a strong buy thesis.

To the contrary, at Wunderlich, analysts think that yesterday's rally in the shares was overdone and that First Solar is destined to fall right back down again -- perhaps as low as $14 a share. If that sounds pessimistic to you, though, consider: First Solar today has no profits. It has practically no cash -- cash reserves are a mere $8 million net of debt, while cash-burn was last clocked at well in excess of $750 million a year.

The way First Solar's going, even $120 million in cost-cutting may not be enough to save this stock.

Big Blue gets smaller
Last but not least, we come to IBM. Big Blue exceeded expectations in yesterday's earnings report, but that's not helping it much on Wall Street, where most analysts are standing pat on their recommendations, while others are curbing their enthusiasm rather abruptly. This morning, analysts at Australian equities shop Macquarie announced a downgrade on IBM, revoking their previous "buy" rating and dropping the stock back to "neutral."

Why are they doing this? Basically for the same reason I advised investors to stay away from IBM late last year: It's too expensive. Even with a 1.5% dividend, IBM's P/E ratio of 15.4 looks too rich to justify in light of the company's 10.5% long-term growth rate, in my opinion. Free cash flow at the company is strong, but not strong enough to make up the difference. Actually, once you factor in the company's heaping helping of net debt, even valued on free cash, IBM shares trade for an enterprise value-to-free cash flow ratio of 15.4 -- identical to the reported earnings-based P/E.

Foolish takeaway
IBM may be a great company -- its numbers certainly look better than what we saw at "rival" Infosys (NAS: INFY) last week. But even Warren Buffett doesn't counsel buying "great" companies unless their share price is at least "good."

My advice: IBM's share price isn't even fair. Don't buy it until it is.

Looking for better places to put your money to work? Read the Fool's new report, and discover which company we just namedThe Motley Fool's Top Stock for 2012.

Whose advice should you take -- Rich's, or that of "professional" analysts such as Stifel, Cantor, and Macquarie?Check out Rich's track record on Motley Fool CAPS, andcompare it with theirs. Decide for yourself whom to believe.

At the time this article was published Fool contributorRich Smithowns no 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. 346 out of more than 180,000 CAPS members. The Motley Fool has adisclosure policy.We Fools don't 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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