Thursday's Top Upgrades (and Downgrades)


Stocks go up, stocks go down -- and so do analysts' opinions of them. 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're looking at an upgrade for PulteGroup (NYS: PHM) , a downgrade for Juniper Networks (NAS: JNPR) , and we'll find out why Wall Street thinks Tempur-Pedic (NYS: TPX) is still on sale.

Humanity needs a new habitat
First up, PulteGroup. Yesterday, homebuilder Hovnanian (NYS: HOV) posted a surprise second-quarter profit. Just $0.02, to be sure, but it was a whole lot better than the $0.32-per-share loss that Wall Street was expecting. Could it be that things are looking up for the housing industry?

FBR Capital thinks so, and hoping to get ahead of the curve, it picked biggest-homebuilder-in-the-nation PulteGroup to outperform. There's just one problem with that, though -- the "curve" is moving faster than FBR. Already, Pulte shares have gained 25% over the past year, and now trade for a pricey 1.7 times book value... and infinity-times earnings, of which Pulte has none.

Granted, the industry is trying to make a turnaround, and the stock trades for a more modest 14 times forward earnings, but even analysts who favor Pulte agree that the company is unlikely to grow profits much faster than 5% per year over the next five years. That hardly seems like a bargain. Investors who shouted "Hooray for Hovnanian!" yesterday, and follow FBR's advice today, could soon find themselves the proud owners of a money pit.

Souring on Juniper
And speaking of money pits, Juniper Networks shareholders have seen 45% of their investment evaporate into thin air over the past year. This morning, analyst Needham & Co. finally threw in the towel, conceded defeat, and revoked its buy rating on the stock.

Downgrading to hold, Needham grumbled that despite all the losses, it still thinks Juniper is "a solid company with respectable growth prospects." That said, Juniper's "Routing and Enterprise Switching markets are likely to undergo fundamental change as networks topologies shift to adapt to virtualization, cloud services and the integration of service provider routing with the optical transport layer."

And yet, could it be that Needham was both too early in getting excited over Juniper and too early in giving up on the stock? After all, with a price-to-free-cash-flow ratio of 16, and an enterprise value-to-free-cash-flow ratio of barely 12, the stock doesn't look too awfully expensive relative to its 14% projected growth rate. To the contrary, Juniper looks cheap. Admittedly, it took a 45% decline in market to get that way. But exiting the stock, now that it's finally a bargain, looks like a classic example of buying high and selling low.

Meanwhile, back at the ranch-style home
Finally, and returning to the housing theme that we began with, we turn to a company that helps to outfit homes: mattress maker Tempur-Pedic -- the subject of multiple downgrades, and twin cuts to target price on Wall Street today.

On Wednesday, Tempur cut its outlook for Q2 and 2012 earnings, warning of a 50% decline in profits for the current quarter. This prompted an immediate rush to judgment, with currently tallying no fewer than three separate downgrades (by William Blair, Wedbush Morgan, and Piper Jaffray). What's particularly striking here, though, is that two other firms that cut their price targets on the stock -- Longbow and Stifel Nicolaus -- both still predict share prices for Tempur that could produce profits on the order of 50% or more for new investors.

Longbow, which cut its price target from $77 to $39 per share, suggests a near-double for this $22 stock. Stifel, which had been even more aggressive on Tempur and is now adopting a once-burned, twice-shy stance on the stock, cut its price target from $89 down to $30.

Both analysts still recommend buying the stock at its new-and-improved price level of about eight times this year's guidance for earnings ($2.70 per share). And while it won't ease the pain of shareholders who have lost money on Tempur already, with the company's long-term growth still projected to exceed 16% after this year's slump, that sounds like good advice for new investors.

Fool contributorRich Smithholds no position in any company mentioned. The Motley Fool owns shares of Tempur-Pedic International.

At the time thisarticle was published

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