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. Today, our top trio of newsmakers includes newly buy-rated Wal-Mart (NYS: WMT) , balanced by less positive notes on Annaly Capital (NYS: NLY) and Coinstar (NAS: CSTR) .

Always higher price targets, always?
Wal-Mart gets our first dose of Wall Street love this morning. The world's biggest retailer won an endorsement from Deutsche Bank last week, when the megabanker removed its sell rating on Wal-Mart and upgraded to "hold." That was good news, but today the bankers at Stifel Nicolaus went Deutsche one better, upgrading Wal-Mart all the way to "buy," and slapping a $83 price target on the stock for good measure. But is Wal-Mart worth it?

Deutsche argued last week that Wal-Mart was a good defensive play for tough economic times, and could even thrive in a weak economy by stealing market share from the likes of grocer SUPERVALU (NYS: SVU) and electronics superstore Best Buy (NYS: BBY) . It may be right about that, but even if it is, and Wal-Mart achieves the 8% long-term growth rate most folks on Wall Street envision for it, the stock looks supremely pricey at 16 times earnings today.

Could shares gain 11% in a year, as Stifel predicts? Sure, but it would have to get even more overvalued to do that. Smart investors shouldn't bet on that happening.

Does anyone love Annaly?
Speaking of overpriced stocks, last week the folks at Wunderlich downgraded Annaly on worries that continued asset sales might imperil the company's ability to pay big dividends over the longer term. This morning, analysts at FBR Capital seconded that emotion, and recommended selling Annaly shares -- which at 52 times earnings do look a little pricey.

The company's 12.8% dividend will continue to entice income investors, certainly. But between Wunderlich's worries over its safety, and FBR's suggestion that the company is "significantly more exposed to higher prepayments than several other agency mortgage real-estate investment trust (mREIT) peers," investors today need to ask themselves: Is getting a big dividend today worth the risk of seeing the dividend payer's shares decline 5% tomorrow?

Management says the concerns are overblown, but so far this morning, investors seem to be voting with their feet, and exiting Annaly.

"I got a pocketful of quarters, and I'm headed to the arcade..."
...and away from shares of Coinstar. This seems to be the song that Compass Point is singing this morning. According to, the analyst recently crunched the numbers at Coinstar and agrees that Coinstar is gaining more and more share of the DVD rental market. Problem is, Compass Point thinks the market itself is shrinking.

Extending the trend out to its logical conclusion, Compass Point warns that "Redbox will soon dominate the physical rental market but it may only be a fraction of the current size." This has the analyst ratcheting back the price it thinks investors should pay for this neutral-rated stock -- to $50 from a previous target of $60.

That may be too conservative, however. Compass Point argues investors can safely pay about 10 times earnings for this stock -- and that's about where the stock is trading. But here's the thing: While Coinstar earned only $159 million over the past year, it currently generates more than $260 million in annual free cash flow. At $1.4 billion in market cap, that works out to only 5.5 times free cash.

Result: Coinstar doesn't need to grow anywhere near the 19% annual rate that Wall Street projects for it, for this stock to be a buy. In my opinion, at 5.5 times FCF, the stock is cheap on almost any growth rate whatsoever.

Fool contributorRich Smithholds no position in any company mentioned.The Motley Fool owns shares of Annaly Capital Management, SUPERVALU, and Best Buy.Motley Fool newsletter serviceshave recommended buying shares of Coinstar and Annaly Capital Management.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying calls on SUPERVALU. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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