Monday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. We're seeing a fair amount of pessimism in the U.S. consumer sector today, as analysts turn negative on Procter & Gamble (NYS: PG) and SUPERVALU (NYS: SVU) . But don't lose heart! There's still hope for profit in an unexpected place: iShares S&P Global Utilities (NYS: JXI) .

Lather, rinse, sell?
First things first. Calling fiscal-third-quarter results at Procter & Gamble "mixed," analyst Oppenheimer announced it was revoking its "outperform" rating on the stock, and downgrading ... not to sell, just yet, but to hold.

Warning that P&G looks "growth-challenged," Oppenheimer is rethinking whether the stock is really worth the $63 and change that Mr. Market is charging for it. The analyst isn't quite sure how much P&G is worth. But worryingly, it's even less certain that P&G will hit its previous $75 price target, which Oppenheimer now says it's "suspending."

About darn time. Seventy-five dollars was always a pie-in-the-sky valuation for this stock, which already fetches 18 times earnings despite being pegged for only a high-single-digit growth rate on Wall Street. The more so when you notice that Procter & Gamble doesn't even generate as much cash profit as it claims on its income statement as net income. (In fact, free cash flow is about 5% below reported income.) While P&G's 3.5% dividend yield is nice, you can get that easily enough at another "G" stock -- General Electric. It pays basically the same dividend yield, costs less, and is growing 50% faster than P&G. Not bad for a blue chip, huh?

Moving downmarket a bit, our next featured stock is discount supermarket chain SUPERVALU. This stock surged earlier in April after promising strong earnings in fiscal 2013. But according to the analysts at Goldman Sachs, that's nothing but a pipe dream: "We see a combination of secular and cyclical headwinds converging with SVU's higher financial leverage to pressure results and limit free cash flow available to shareholders."

What Goldman is saying is that consumers are stretched and have limited ability to spend. (Although bulls could actually argue this is a plus for a discount food retailer like SUPERVALU.) The way Goldman sees it, though, SUPERVALU's massive debt load -- $6.1 billion net of cash, on a stock that is valued at less than $1.3 billion -- puts it at a marked disadvantage to fiscally prudent grocers such as Kroger (which carries a similar debt load, but spread out over a market cap 10 times as big) or Whole Foods (which has no debt at all). Goldman advises selling into the stock's recent rally, or wait around and get hit by a 19% decline in share price.

Given that SUPERVALU did in fact generate $395 million in positive free cash flow last year, Goldman may be overstating the case. Still, even if every penny the company made was put to work paying down debt, at this rate it would take SUPERVALU more than 15 years to get the monkey off its back. Before you buy the stock, ask yourself: How long are you prepared to wait to see a profit from your investment?

Slow and steady wins the race
Looking for a better, safer way to make money? Ace independent analyst Standpoint Research may have found the "stock" for you.

Actually, what Standpoint recommended buying today isn't a stock at all, but the iShares Global Utilities exchange-traded fund. As the analyst explains, "I was looking through our Utilities sector report ... for an idea (or two) as we went to zero weight Utilities in August and have been at zero since. [But] with the S&P now at 1400 I think it is a good time to jump back in to Utilities on a selective and gradual basis."

Recommending the iShares ETF, Standpoint appears to be leaning more toward the "gradual" than the "selective" part of this strategy. As described on S&P Capital IQ, the iShares ETF puts its money "in stocks of companies operating in the utilities sector, which includes electric, gas or water utilities, or producers and distributors of power." True to its name, the ETF invests all around the world, with top holdings that include such well-known names as Dominion Resources and Duke Energy, but also foreign blue chips including Germany's E.ON and England's National Grid.

Valuation-wise, the ETF sells for almost precisely its net asset value. What's more, it pays a 4.6% dividend -- more than Procter & Gamble's payout, less than SUPERVALU's, and arguably safer than either of those.

Fool contributorRich Smithholds no position in any company mentioned. The Motley Fool owns shares of SUPERVALU and Whole Foods.Motley Fool newsletter serviceshave recommended buying shares of Dominion Resources, Whole Foods, National Grid, and Procter & Gamble, as well as buying calls on SUPERVALU.The Fool has a disclosure policy.

At the time thisarticle was published

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