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.

Barclays to the rescue
It's a tough market out there, folks, and tougher still for investors in companies tarred by scandal, or located in a country with questionable business practices. A lot of Chinese stocks are both -- and a lot of these stocks have been taking it on the chin lately. But yesterday, the cavalry rode to the rescue, when investment banker Barclays Capital blared the trumpet and charged back into the Chinese market.

Initiating coverage on a series of hard-hit Chinese equities, Barclays hung "overweight" recommendations upon each of Baidu (NAS: BIDU) , (NYS: YOKU) , SINA (NAS: SINA) , Sohu (NAS: SOHU) , Changyou, and NetEase (NAS: NTES) . Renren (NYS: RENN) got only an "equal weight" rating, however, and DangDang (NYS: DANG) was tagged "underperform" -- so it's not all just happy talk at Barclays. These guys do appear to have some standards to what they're willing to endorse.

But are even the stocks stamped "Barclays-approved" worth owning? Let's take a look at 'em, in no particular order:

There's a lot to like about SINA. Its mid-20s expected growth rate, for example, is one of the faster paces set by the stocks in Barclays' basket. It's not currently profitable, true, but the company does appear to be generating free cash flow -- although it doesn't do a great job of reporting cash flow data clearly, or consistently, so it's hard to be sure. Value the company on last year's free cash flow, however (which we know), or next year's earnings (which we can guess at), and SINA appears to be selling for multiples in the low-to-mid 50s. Although I see the potential in the stock, it just doesn't wow me at these prices.
It's also not hard to see the potential in "China's YouTube." In less than three years, Youku has rocketed from less than $5 million in annual revenue to more than $90 million. Sadly, this rapid success on the revenue front hasn't done much for the company's bottom line. Youku remains nearly as unprofitable today as it's ever been, a perennial cash burner, with no signs of improvement in sight. Barclays may see big potential in this little Chinese stock, but I see none.
Changyou? No, thanks. I'm good. This maker of massively multiplayer online role-playing games sports high growth rates and a low P/E. But free cash flow at the company doesn't quite back up the reported net-income figures, and it has not been growing. Current data is hard to come by, but FCF was basically flat between 2009 and 2010. Although the stock looks interesting, there's a better way to play it.
The better way to play Changyou? How about its parent company, Sohu? Here we're looking at a stock that sells for less than 14 times earnings, which looks like a bargain price relative to consensus growth estimates of nearly 17%. Sohu also generates much more cash profit than it reports as net earnings -- enough to give the stock a price-to-free cash flow ratio of just over 10. Throw in a cash hoard of $800 million, and no debt whatsoever, and I agree with Barclays: Sohu looks so good, I just might buy it myself.
I'm nearly as optimistic about NetEase. P/E ratio of 13 -- good. Price-to-free cash flow ratio of 12 -- better. Enterprise value-to-free cash flow ratio of 8.2 -- best of all! NetEase boasts a cash stash nearly twice as big as Sohu's, and it's growing nearly as fast. Analysts project 16.6% average annual profits growth over the next 10 years. To me, NetEase is another easy decision to make: "buy."

Last but not least, we come to "China's Google" -- the stock that I'd most like to own if the price was right. You have to dig through a lot of SEC filings to nail down the real cash profitability for this one. But if you focus on 6-K filings that appear toward the end of January, April, July, and October, you can eventually collect all the data you need. Baidu generated $718 million in free cash flow over the past 12 months -- lagging reported net income of $760 million just a bit. This means that if Baidu looks expensive at 57 times earnings, it's actually even pricier than that.

Foolish final thought
Does Baidu's 47% long-term growth rate justify the price? Perhaps. Baidu is probably the premier name in China's stock market today, and it's clearly a better bet than several of the ideas Barclays gave us this week. Still, given my druthers I think I'd be more comfortable buying the more obvious bargains offered by Sohu and NetEase.

Agree? Disagree? Test your own investing mettle against Barclays -- and me -- on Motley Fool CAPS. Recommend the stocks you think will outperform the market, and diss the ones you don't. And just for kicks, add Baidu, Sohu, and NetEase to your Fool Watchlist, so you can see whether my predictions pan out and do indeed proceed to beat the market.

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. 288 out of more than 180,000 members.Motley Fool newsletter serviceshave recommended buying shares of SINA, Baidu,, and 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.