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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Today, we'll be looking at a pair of new buy ratings, for salesforce.com (NYS: CRM) and Riverbed Technology (NAS: RVBD) , respectively, followed by a downgrade for red-hot yoga clothier lululemon athletica (NAS: LULU) . Assume the forward-pointing dog position, as we begin.
First up: Salesforce
Salesforce shares have had the pleasure of twin good-news announcements recently. First, a PR piece from the company itself, which says it has 20,000 customers in Europe, a number up 32% from last year. The company is gearing up for its Cloudforce London 2012 conference, where 14,000 people are now registered to attend.
More positive press releases can be anticipated as the conference progresses, and analyst Oppenheimer is trying to get ahead of the curve, upgrading Salesforce shares to "outperform" this morning. But with the stock currently unprofitable, and priced at 70 times next year's earnings, is Salesforce really likely to outperform the market from here on out?
In a word: No.
Don't get me wrong. Things aren't quite as bleak as Salesforce's trailing losses might suggest. Fact is, while GAAP-unprofitable over the past 12 months, Salesforce did in fact generate $473 million in free cash flow for the period. Even so, this leaves the stock trading for a rather lofty 43 times FCF. Suffice it to say that this is an optimistic valuation for a firm that most analysts believe will grow at just 27% per year over the long term. Seems to me, the chances for outperformance from today's already high price look rather slim.
Cry me a river
In happier news, investors who follow the advice of Gabelli & Co. -- who recommended buying shares of Riverbed Technology -- should do quite well. While shareholders of the stock have had little to get excited about lately (more tears than cheers), Gabelli points out that the stock's recent underperformance was mainly due to "perceived market deceleration and weak execution in a major product transition."
This may soon change. Gabelli argues that as the No. 1 player in WAN optimization (Cisco (NAS: CSCO) is No.2), Riverbed should "outpace market growth in 2012." And while many investors look at Riverbed's still-high 48 P/E and think it's expensive, Gabelli argues that when compared to other major players in the communications equipment industry, Riverbed is actually cheap -- and could be worth as much as $30 a share by next year. Could Gabelli be right?
Actually, yes. And in fact, I think Gabelli is right about Riverbed. Consider: While GAAP earnings for the company look weak, Riverbed generated some $178 million in free cash flow last year -- about three times as much as it reported earning under GAAP. The resulting price-to-free-cash-flow ratio of less than 15 for the company seems cheap in the extreme if Riverbed can succeed in hitting the 21% growth target that Wall Street has set for it. I think the stock's a buy -- and in fact, I'm so certain of this that I'm putting my reputation on the line and recommending it as such on Motley Fool CAPS today.
Think I'm wrong? Follow along.
A doozy of a downgrade for Lulu
Last (and least), and with apologies for ending on a down note, we turn to lululemon athletica, currently shrugging off the effects of a downgrade by KeyBanc Capital Markets. While optimistic about the business over the long term, KeyBanc cites the stock's 54% run-up from December through May as evidence that Lulu investors have gotten a bit carried away.
At a market cap north of $10.3 billion, but only $184 million in trailing profits (and a free cash flow number nearly $100 million below that), Lulu shares sell for a very high price: more than 56 times trailing earnings (and a correspondingly higher P/FCF ratio).
Simply put, there's no way Lulu can grow fast enough to justify the prices investors are now paying for it. The 27% growth rate that Wall Street posits for the stock certainly won't be fast enough to sustain these sky-high multiples to earnings and free cash. Result: Beware Lulu. At the first trip-up, this stock's due for a doozy of a dive. If like me, you think Lululemon is due for a correction, check out one retailer that has our chief investment officer so convicted he has named it "The Motely Fool's Top Stock for 2012." Inside you'll learn about a retailer headed by an all-star management team that is shaking up Latin America. Click here for this free special report, available for a limited time.
Whose advice should you take -- mine, or that of "professional" analysts like Oppenheimer, Gabelli, and KeyBanc? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
At the time this article was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.He does, however, have public recommendations available on more than 60 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle "TMFDitty" -- and iscurrently ranked No. 324 out of more than 180,000 CAPS members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Riverbed Technology, Cisco Systems, salesforce.com, and lululemon athletica.Motley Fool newsletter serviceshave recommended buying shares of Riverbed Technology, lululemon athletica, and salesforce.com.Motley Fool newsletter serviceshave recommended creating a stock position in Riverbed Technology.Motley Fool newsletter serviceshave recommended creating a bear put spread position in salesforce.com.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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