Wednesday'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 ask why Oppenheimer just logged on to LogMeIn (NAS: LOGM) , but made a withdrawal from JPMorgan Chase (NYS: JPM) . And we'll throw pet lovers a bone as well, as we examine the new buy rating for PetSmart (NAS: PETM) .
PetSmart is no dog
In fact, let's start off with that one: Morgan Stanley's initiation of PetSmart at an overweight rating. (On Wall Street, by the way, "overweight" is a compliment. It's an instruction to institutional investors to go ahead and give a stock a larger-than-normal allocation of money to a given stock within a broader portfolio). But does PetSmart deserve the compliment?
On the one hand, the 24 times trailing earnings that investors are asked to pay today does seem a bit much. But PetSmart may be worth the premium price. The company sports an above-industry-average growth rate of 16.5%. PetSmart also boasts superior quality of earnings, with free cash flow surpassing reported net income by fully 60%.
At 14 times free cash flow, with a 16%-plus growth rate, PetSmart may look like an overpriced mutt, but it's really a purebred in disguise.
JPMorgan... Chase, or run away?
In contrast, with a P/E of 7.7, JPMorgan Chase just might be the kind of "bargain" stock that bargain hunters should avoid. This morning, analysts at Oppenheimer knocked $2 off their price target for JP.
Granted, targeting a $56 share price, Oppenheimer still clearly thinks there's value to be had in this megabanker's shares. But there's danger, too. Today, JP CEO Jamie Dimon is in Capitol Hill to explain his bank's infamous $2 billion trading loss. The negative PR potential of this appearance alone may justify Oppenheimer's walking back its price target a bit. Plus, there's still the European debt crisis to contend with.
In short, JP has problems galore in store. Even with shares trading at 0.7 times book value, investors should be cautious.
LogMeIn: Accept or decline?
Fortunately, JP Morgan isn't the only investing idea Oppenheimer has for us today. It's also decided to recommend shares of PC remote-access software maker LogMeIn -- a $30 stock that Oppy thinks is worth $40, easy.
Quoting from Oppy's note, StreetInsider.com writes: "LOGM is well positioned to benefit from the rise of a growing remote workforce and a plethora of device choices. We believe that LOGM's business model provides a high level of predictability, and the company's focus on enhancing its best-of-breed solutions remains a competitive differentiator."
Granted, as with PetSmart, owning "best-of-breed" will cost you here. On the surface, LogMeIn looks terribly expensive with a triple-digit P/E ratio that seems wholly unjustifiable in light of the stock's 23.5% earnings growth rate. But before you delete LogMeIn from your list of investing ideas, take a look at the cash flow statement.
Here we see that LogMeIn is actually much more profitable than it looks. While GAAP profits amounted to less than $6 million last year, actual free cash flow was nearly $30 million. So viewed from this perspective, LogMeIn actually doesn't cost all that much -- about 25 times free cash flow. And if you net out the firm's cash reserves, the firm's enterprise value drops to an even more reasonable-sounding 18.6 times free cash flow.
Judging from the high short interest in this stock, few investors are looking at LogMeIn this way... yet. But all it takes is one earnings beat, and a short squeeze, to convert skeptics into buyers in a hurry.
At the time this article was published