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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

"May you live in interesting times ..."
The markets had a bit of a hiccup yesterday, as you may have noticed. But that's not necessarily a bad thing. While investors already in the market are smarting, anyone with spare cash available to invest is being presented with the buying opportunity of a lifetime -- or, at least, the buying opportunity of the year.

For that reason, I've been ready and waiting to see the onslaught of upgrades as Wall Street starts shopping for bargains in a suddenly cheaper market -- and I haven't been disappointed. Over the past 24 hours, the bright folks at Standpoint Research gave us not one, not two, but seven separate ideas for where to invest your money in a market gone mad:

  • Buy Archer-Daniels Midland (NYS: ADM) .

  • Buy Crocs (NAS: CROX) , too.

  • Buy Intel (NAS: INTC) and Jacobs Engineering (NYS: JEC) .

  • And if you have any cash left, spend it on Sabesp (NYS: SBS) , Safeway (NYS: SWY) , and True Religion (NAS: TRLG) .

I'll bite. Why?
Why the sudden interest in stocks in the middle of a market meltdown? As Standpoint explains: "We always have a shopping list ready for days like [Monday], ready to reinstate old names when they come back down to where they were when we originally recommended them." On today's specific companies, Standpoint notes that Jacobs, for example, "is now trading near where it was during the crash in 2009 even though the company is not as dependent on U.S. government spending as some other names in this space." Safeway "beat on EPS and revenues and reaffirmed FY11 EPS guidance" -- yet sold off anyway. When a stock gets cheaper, for no particular reason -- when, indeed, in Safeway's case the stock looks better than it did when originally recommended, that's not a good time to sell.

Instead, Standpoint is doing just what we also advise here at the Fool: "not trying to pick a bottom," but rather "gradually adding names ... as the market declines and ... looking out 18-36 months" rather than focusing on a given week's turbulence.

The nominees, please
That being the case, I'm loath to disagree with Standpoint -- and for good reason. Standpoint doesn't just think like a Fool. It also thinks as well as some of the best Fools we have on staff, and it outperforms nearly 97% of the investors we track on CAPS. Nonetheless, I'm still going to quibble with a few of its picks this week -- but only a few.

Selling for just 12.5 times earnings, Safeway doesn't look expensive, exactly. But with a projected growth rate just shy of 10%, and a pretty sizeable slug of debt on its balance sheet, even Safeway's dividend yield of 3.1% makes the stock look only "fairly priced" to me.

Jacobs Engineering
On the surface, Jacobs appears fairly priced at a P/E of 14 and with long-term earnings growth estimated at 13%. But the stock pays no dividend, and Jacobs has a poor history of generating free cash flow at anywhere near the amount of its claimed "net income." All in all, I find this to be the worst of Standpoint's choices this week.

Archer Daniels Midland
I like agriculture stocks as a long-term play on the fact that people need to eat. But ADM isn't the way I'd play the trend. Here we have an apparently cheap stock (8.6 times earnings) with a decent growth rate (10%) and a modest dividend yield to boot (2.2%). All that sounds good so far -- but only until you notice that first, ADM is toting around nearly $10 billion in net debt, and second, that the stock's currently way, way negative for free cash flow. In fact, it burned nearly $3.6 billion of the stuff over the past 12 months.

Last but not least on my "dislike" list is Standpoint's recommendation of Crocs. I know, I know -- I actually came out in favor of Crocs just a few days ago, wowed like many investors by the company's blowout Q2 report. But since then, I've had time to crunch the numbers more carefully, and I'm no longer quite as thrilled by what I see. Crocs is beating estimates and raising guidance on GAAP earnings, but on the cash-flow statement I'm starting to see signs of weakness -- free cash flow that backs up only 71% of reported net income, and rising inventories and accounts receivable. The situation's not critical yet, but at a price more than 31 times annual free cash flow, and a growth rate of 25%, Crocs looks only fairly priced to me today. In a market that's now littered with dirt-cheap dream stocks, I see no need to go slumming in Crocs.

Switching around now to the stocks I like ...

True Religion
I like this one. With the stock trading at 16 times earnings, it may appear more expensive than Safeway, but True Religion has several advantages that Safeway lacks -- no debt, and net cash, for starters. It also has a growth rate twice as fast. Sew it all together, and what you come up with is an enterprise selling for less than 10 times free cash flow but projected to grow at 20% per year for the next five years. I'd say that makes True Religion a winner.

I also like Intel. It's the big dog in semiconductors, cash-rich, and almost always free cash flow-positive. As I said back in April, the company's promise to spend heavily on capex this year had me worried that free cash flow would take a hit -- and it has. Based on Intel's most recent 10-Q, it looks like the company has slipped to less than $9 billion free cash flow generated over the past 12 months. That's not as good as what the company's income statement suggests it's doing -- but post-sell-off, it's good enough to give Intel an enterprise value-to-free cash flow ratio of just 11.1. With Intel projected to grow at 11% per year over the next half-decade, and paying a 4% dividend, I think it's cheap enough to own.

Sabesp (a.k.a. Companhia de Saneamento Basico do Estado de Sao Paulo)
This Brazilian sanitation worker certainly looks cheap at 6 times earnings. What's more, you'd think sewage treatment in Sao Paulo would be a growth industry. In fact, analysts on average predict only 6% long-term earnings growth out of Sabesp, but with the stock in Brazil yielding 5.1% on its dividend, I think even modest growth makes this one a winner.

And there you have it, folks. All of Standpoint's recommendations this week are defensible to one degree or another. Three of them look like out-and-out winners. My advice: Check out the best before moving on to the rest.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 425 out of more than 180,000 members.The Fool owns shares of and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Intel and Sabesp and creating a diagonal call position in Intel.We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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