Tuesday's Top Upgrades (and Downgrades)

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This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we'll look at why AOL (NYS: AOL) just got its target price raised, why AK Steel (NYS: AKS) has been downgraded, and why Lions Gate may (NYS: LGF) be a roaring buy. Let's dive right in, beginning with AOL.

Welcome! You've got a higher target price!
AOL shareholders got a welcome email this morning, when analysts at Barclays upped their target price on the company's shares to $35. The news comes in response to AOL's plan, announced yesterday, to give its shareholders the bulk of its windfall from this year's Microsoft (NAS: MSFT) patent sale. According to AOL, each AOL shareholder can expect to receive a special dividend payment of $5.15 per share shortly. Plus, the company will use $600 million of its winnings to repurchase shares.

The net result of this will be to lower AOL's share count, concentrating earnings among the fewer shares remaining... and, accordingly, raising the value of these shares. While Barclays still has its doubts about the viability of AOL's business, and declines to endorse it as a buy, it does acknowledge the shares' higher worth, due to the buyback. Hence -- the higher target price.


 AK's far from OK
Moving in the other direction this morning is UBS, which sees increasing risk to AK Steel from "low cost imports," and is lowering its price target -- and its rating -- in response. The more cheap foreign steel that arrives on U.S. shores, the "weaker pricing" U.S. steelmakers like AK are able to charge for their product. And this is likely to hurt profit margins -- and profits -- at AK.

"Furthermore," notes StreetInsider.com, UBS also has an "ongoing concern" over AK's liquidity.

No surprise there. With more than $1.2 billion in debt, but less than $40 million in the bank, liquidity is a concern at AK Steel. It's a concern made all the more acute by the fact that AK Steel has burned $265 million in cash over the past year. Falling steel prices aren't going to do much to help that number -- to the contrary, they threaten to accelerate AK's cash-burning. UBS urges investors to dodge this bullet, and sell the shares. They're right to do so.

Can Lion's Gate roar?
But fear not, brave investor. It's not all bad news. Some stocks may fare poorly, but others will do well, and according to the analysts at Barrington Research, Lion's Gate is one of the good ones. This morning, Barrington initiated coverage of the studio behind Hunger Games, predicting that over the next year Lion's Gate will outperform the rest of the market. They may even be right about that.

Sure, on the one hand there seems little to like about Lion's Gate today. The company's not profitable. It's burning cash. The Lion's also got a hearty dose of debt -- nearly $1.4 billion net of debt on hand. Analysts see things turning around shortly, however, as the success of Hunger Games helps lift Lion's Gate back into profitability next year. Meanwhile, longer-term estimates call for 15% annual profit growth at the company.

Still, it's never easy to pick winners in the boom-and-bust, up-one-year, down-the-next world of movie making. Sure, Lion's Gate makes quality films. But with the stock up nearly 90% over the past year, a lot of Lion's Gate's future success may be baked into the stock price already. Think carefully before following Barrington's lead and trying to catch this Lion by the tail.

Fool contributorRich Smithholds no position in any company mentioned.Motley Fool newsletter serviceshave recommended buying shares of Microsoft.Motley Fool newsletter serviceshave also recommended creating a synthetic covered call position in Microsoft.

The article Tuesday's Top Upgrades (and Downgrades) originally appeared on Fool.com.

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

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