This Just In: Upgrades and Downgrades
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'll be looking at a series of new tech recommendations from Citigroup, followed by an unusual biotech idea from Credit Suisse. Let's dive right in.
All tech, all the time
First up, analysts at Citigroup are wading back into the tech sector, and they're not being shy about it, either. With new buy ratings on Cisco (NAS: CSCO) , Riverbed Technology (NAS: RVBD) , F5 Networks (NAS: FFIV) , and Juniper Networks (NAS: JNPR) , basically Citi is saying that if it's tech, it's a "buy." But what will you get for your money?
According to Citi, the biggest gains are to be had in shares of much-maligned Juniper, which at a share price of just under $17 could be as much as 30% undervalued. F5 offers the next greatest profit potential, with a $130 target price that's 27% ahead of current pricing, while Riverbed is not far behind with a potential 25% profit. Lagging the pack, tech bellwether Cisco still offers the chance of a respectable 14% profit if it hits Citi's targets.
Achieving these profits, however, is going to require investors to take a bit of a gut-check -- because on the surface, none of these companies exactly looks like a bargain. I mean, just get a load of the P/E ratios here! Cisco, at 12 times earnings, is the cheapest-looking of the bunch, but its 9% projected growth rate hardly inspires. As for the rest, Juniper at 29 times earnings, and F5 at 31, look downright expensive despite their faster expected growth rates. And Riverbed -- the stock I've said I actually prefer above all the rest? -- it costs a positively nosebleed 52 times trailing earnings.
The good news, though -- and the reason Citi just might be right that these stocks are "buys" -- is that when you look past the income statements to examine what these companies are doing on the free cash flow front, the stocks don't look all that expensive after all. After all, cash is king and allows us to look through accounting conventions that can depress earnings per share. Cisco, with $7.4 billion in trailing profits, generated free cash flow 38% higher than that number last year. Likewise F5 (60% more free cash flow than reported income), Juniper (78%), and grand-prize winner Riverbed, which churned out three times more cash than GAAP accounting standards permitted it to characterize as "net income."
Long story short, Citi's not quite as crazy as you might think in recommending these stocks. They're actually a whole lot cheaper than they look.
Not tech, some of the time
Switching gears now, and crossing one ocean, we turn to French megabanker Credit Suisse and its curious recommendation of small-cap biotech Corcept Therapeutics (NAS: CORT) . With no major media outlets covering the upgrade, it's hard to say what exactly Credit Suisse finds attractive about Corcept.
What we do know is that the company's new Korlym hyperglycemia drug has been on the market for about two months now. This means that in all likelihood, Corcept's upcoming earnings release, due out in early August, will be the first to depict Corcept as an actual revenue-producing business.
Granted, at a market cap of nearly $380 million, Corcept will have to generate quite a lot of revenue for its valuation to look anything but absurdly overpriced. But already, other analysts are starting to place bets on the company's success. Corcept's annual loss is expected to shrink to $0.38 per share this year. Meanwhile, next year's consensus estimate of a $0.02-per-share loss offers the distinct possibility that -- with a little luck and a well-timed earnings beat, Corcept could actually break even, and perhaps even earn a meaningful P/E ratio.
So far, Corcept has done little but lose shareholders money over the past year, and it remains a highly speculative investment. (Not necessarily a bad thing. Some of our favorite stocks are more speculative health-care stocks.) Once investors get a P/S and a P/E to hang their valuations on, though, the stock just might start moving in the right direction for a change.
If you'd like to learn more about a health-care company taking the industry by storm, read this special free report, entirely free, from our team at Motley Fool Rule Breakers.
Whose advice should you take -- Rich's, or that of "professional" analysts such as Citigroup and Credit Suisse?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 Smithholds no position in any company mentioned. Check out hisholdings and a short bio.The Motley Fool owns shares of Citigroup.Motley Fool newsletter serviceshave recommended buying shares of Riverbed Technology and F5 Networks and creating a synthetic long position in Riverbed Technology. 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. Try any of our Foolish newsletter servicesfree for 30 days.
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