Wednesday's Top Upgrades (and Downgrades)

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Stocks go up, stocks go down -- and so do analysts' opinions of them. This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, Wall Street's placing some big bets on the American consumer. Let's find out why, as we dig into this morning's analyst moves for Costco (NAS: COST) , Wal-Mart (NYS: WMT) , and Apple (NAS: AAPL) .

Costco: A blue-light special for warehouse shoppers
Costco is climbing again, in case you haven't noticed. In fact, yesterday it topped the $85 price target that analyst McAdams Wright Ragen had set for it. And you know what that means: Time to change the price target. With Costco shares back on the upswing, McAdams apparently felt a target tweak was necessary, so this morning the analyst upped its objective to $89 on the stock.

Why not go all-in, and project a more significant price spike? Well, the truth of the matter is that McAdams isn't all that sure that Costco can go up much more. The analyst only rates Costco a "hold" after all, and for good reason.


Priced at 24 times earnings, investors are already paying a pretty penny for the sub-13% annual growth that Costco is projected to produce over the next few years. Yes, Costco is the quality operator in the warehouse space, outclassing privately held BJ's and Wal-Mart division Sam's Club. Yes, you should be willing to pay up for quality. But still, there's such a thing as paying too much for quality. While McAdams may be right about Costco going a bit higher, smart investors will wait for it to go lower before buying.

And speaking of overpriced retailers
Next up is Wal-Mart, the recipient of a similar price target hike from Barclays. The British banker foresees above-consensus earnings coming out of Wal-Mart this year, and thinks the stock could earn as much as $5.35 per share. It's backing up that bet with a higher price target ($70) ahead of Friday's annual shareholders' meeting.

But try not to get too excited about this one. Although cheaper than Costco on a P/E basis, Wal-Mart's also growing slower and, unlike Costco, this retailer generates free cash flow inferior to what it reports as GAAP earnings. Result: 14 times earnings is too high a price to pay for 8% long-term growth. Barclays thinks the stock is a buy, but Barclays is wrong.

Apple of their "I"
Finally, we come to the stock that everyone (used to) want to own: Apple. After outperforming the market for years, the iEverything corporation hit a bit of a rough spot lately, losing billions upon billions in market cap.

If you ask the analysts at ISI Group, though, they'll tell you this is actually good news for Apple owners, and new investors alike. Selling for a Wal-Mart-like valuation of just 14 times earnings, Apple is actually the anti-Wal-Mart. Inventive where Wal-Mart is boring. Cash-rich where Wal-Mart is debt-laden. Fast-growing where Wal-Mart is plodding.

With a projected long-term growth rate of nearly 20% per year, and a P/E ratio that's just a fraction of that number, Apple's a classic value stock with real growth potential. ISI Group says it's a buy and a lock to go to $650. ISI is right on the money.

1 more pick?
If you're not confident in these analysts' picks, why not take one from our expert Fools instead? You could read up on The Motley Fool's Top Stock for 2012. It's an emerging-market retailer that's taking Latin America by storm, and we think it's got a long runway ahead of it. Read more here.

Fool contributorRich Smithholds no position in any company mentioned. The Motley Fool owns shares of Apple and Costco Wholesale.Motley Fool newsletter serviceshave recommended buying shares of Apple and Costco Wholesale.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Wal-Mart Stores.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple.

At the time this article was published

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