Friday's Top Upgrades (and Downgrades)

Before you go, we thought you'd like these...
Before you go close icon

Stocks go up, stocks go down -- and so do analysts' opinions of them. This series looks at which upgrades and downgrades make sense, and which ones investors should act on. And today, we're going to cover a lot of ground -- beginning with Nokia's (NYS: NOK) shiny new upgrade, taste-testing a separate upgrade for United Natural Foods (NAS: UNFI) , and then digging into a new downgrade at Yamana Gold (NYS: AUY) . It's a long trip, so let's get started.

What goes down must (eventually) come up
Yesterday, in what's become almost a daily refrain in Finland, shares of Nokia got hit with yet another downgrade. The stock's down some 50% this year already, but even a cell phone dropped from the top of the Empire State building has to stop falling eventually -- and this morning, two top analysts agreed it's time to call a halt to Nokia's slide.

Both Oppenheimer and Citigroup weighed in this morning with grudging approval of Nokia's decision to lay off 10,000 employees and conserve cash until the new Microsoft (NAS: MSFT) Windows 8 software arrives and can be added to Nokia's smartphone lineup. Notably, Citi in particular thinks we could see Nokia return to profitability as early as next quarter.


The analysts are hardly jumping up and down with joy, though. At this point, neither thinks Nokia merits more than a "neutral" rating -- but at least that's better than the "sell" ratings they used to recommend. Whether Nokia deserves even this low level of endorsement, though, will depend on whether it can succeed in restoring profitability ahead of schedule -- because as things stand, Nokia at 31 times trailing earnings looks like a pretty poor investment.

United Natural Foods: A healthy addition to your portfolio?
A better idea -- at least, in the opinion of Argus Research -- might be to pick up a few shares of organic-food distributor United Natural Foods. Of course, with the stock already up 23% in share price over the past year, it's somewhat surprising that Argus takes the position that it's making a "valuation call" here. Indeed, if that's the case, one has to wonder why the specific "call" being made is to buy the stock rather than to sell it.

Priced at 30 times trailing earnings, United Natural already looks pricey relative to the 14% long-term growth expectations Wall Street has set for it. And in fact, the stock's even more expensive than that. Free cash flow at United Natural is a paltry $11.4 million for the past year, or barely 13% of reported net income. With quality of earnings this low, United Natural is the equity equivalent of junk food for your portfolio.

Gold? Or Fool's gold?
Last but not least, we have some bad news for gold bugs -- Wall Street hates your stocks. Or at least, one particular analyst, Canadian banker Dundee Capital Markets, is not overly fond of fellow countryman Yamana Gold.

This morning, analysts at Dundee cut their rating on Yamana from buy to neutral, and it's hard to argue with the call. As we saw with United Natural, this gold miner looks expensive from at least two separate perspectives.

Based on simple P/E analysis, Yamana's 2-times-earnings valuation hardly looks like a bargain relative to the 10% long-term earnings growth that Yamana's pegged for. Plus, from a free cash flow perspective, Yamana's $310 million in trailing free cash production hardly impresses. While not quite as big as the disconnect between reported profits and actual cash generation at United Natural, Yamana's still only holding onto about $0.54 worth of cash from each dollar it claims to be "earning."

Long story short, at 39 times FCF, Yamana may not even be the "hold" that Dundee says it is. Investors might actually be better off selling this one.

Fool contributorRich Smithowns shares of Nokia, but he holds no other position in any company mentioned. The Motley Fool owns shares of Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Microsoft and creating a bull call spread position in Microsoft.

At the time this article was published

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

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners