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 Bed Bath & Beyond (NAS: BBBY) , now-downgraded Time Warner (NYS: TWX) , and for organic mac and cheese maker Annie's (NAS: BNNY) -- a hike in price target. Let's dig in.

Bed Bath and Beyond $70
No two ways about it -- Bed Bath & Beyond shares have had a rough time of late. After trading north of $70 for nearly three months, the stock crashed after first-quarter earnings and fell back toward today's price level of $63 and change.

But fear not; according to the analysts at Canaccord Genuity, Bed Bath & Beyond shares should be bouncing out of bed any day now. And once they do, they'll run to $75 within a year. Why? quotes the analyst extolling "the addition of Cost Plus [as one] potential growth lever. We believe Cost Plus' contribution to EPS will grow from $0.01 in F2012 to $0.32 by F2016." Indeed, after years of losses, Cost Plus booked back-to-back profitable years before the buyout. While at nearly 15 times earnings, Bed Bath & Beyond isn't an obvious bargain, it's not particularly expensive, either.

And investors in Bed Bath & Beyond who also shop there get an added bonus: When the credit card bill comes, and you see a big charge from Bed Bath & Beyond, you can tell yourself as you're signing the check: "Hey, I'm really just paying myself."

Time for Warner?
On the surface, the case for Time Warner looks similar: The stock sells for 16.5 times earnings and, like Bed Bath & Beyond, is expected to grow earnings at about 11% per year over the next five years. So why did Caris & Co. decide to downgrade it?

For one thing, because Time Warner is a lot like Bed Bath & Beyond. Both valuations look no more than average on the surface -- and that's just what Caris downgraded Time Warner to -- "average." The analyst cites valuation as a prime concern, and it's right to do so. While Time Warner's PEG ratio is similar to Bed Bath & Beyond's, a crucial difference between the companies is that Bed Bath & Beyond has about $1.7 billion worth of cash stuffed under its mattress. Meanwhile, Time Warner has a $17.5 billion net-cash deficit in its balance sheet.

If Bed Bath & Beyond is a bit cheaper than it looks, well, Time Warner is a whole lot more expensive.

How much is that bunny in the window?
And speaking of expensive, analysts at Canaccord have also upped their target price for organic chef Annie's. The analyst calls "one of the strongest brands in the natural/organic food industry" and believes it will deliver strong growth, high margins and impressive financial returns."

And yet, at a share price more than 90 times annual earnings (and with free cash flow so weak that its price-to-FCF ratio rises into the triple digits), this is a good example of investors being asked to "pay up for quality" -- and indeed, to overpay.

Even if Annie's succeeds in delivering the 25% compound annual earnings growth that Wall Street expects it to, 90 times earnings is a terribly high price to pay. Little wonder that, even as it raises the target (to $42 -- just ahead of the current price), Canaccord can't quite bring itself to rate the stock anything better than a "hold."

Fool contributorRich Smithholds no position in any company mentioned.Motley Fool newsletter serviceshave recommended buying shares of Bed Bath & Beyond.

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