Wednesday'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 headliners include upgrades for News Corp. (NAS: NWSA) and Fossil (NAS: FOSL) , alongside a downgrade for TreeHouse Foods (NYS: THS) .

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A day after Fox News lost its election, you probably wouldn't expect folks to be excited about parent company News Corp. But that's the case. Following a first-quarter earnings beat, investment banker CLSA is upgrading News Corp. to "buy" this morning.

In addition to the obvious objection, though, this upgrade is also suspect based on the valuation of the stock. According to Yahoo! Finance, News Corp. shares currently cost some 52 times trailing earnings. Tune to the free cash flow channel, and the picture's a bit brighter, with News Corp. fetching an enterprise value-to-free cash flow ratio of about 20. Either way, though, News Corp.'s projected long-term growth rate of just under 17% suggests the stock is anywhere from grossly overvalued to maybe -- maybe -- fairly priced. It's certainly not cheap enough to be a no-brainer "buy," however, no matter what CLSA says.

Something old is new again
A better bargain may be found in the shares of today's other big upgrade: Fossil. Once again, we're looking at an earnings beater ($1.28 per share reported yesterday, or $0.12 ahead of estimates). Once again, it's a fast grower (nearly 18%). And once again, we find Wall Street loving it. Caris & Co. rewarded Fossil's strong third-quarter performance with an upgrade to "buy" this morning, and this one looks valid.

Priced at roughly 17 times earnings, the stock looks attractive if it succeeds in hitting Wall Street's target of near-18% long-term profits growth. Fossil boasts the added advantage of a strong balance sheet, in which $139 million in cash on hand exceeds total debt of $113 million.

The one knock against Fossil that I can find: Over the past couple of years, its free cash flow hasn't really lived up to the promises of its reported net income. FCF backed up about 64% of reported income in 2010, but only 48% of income in 2011. Data released on 2012 shows some improvement, but we're still waiting on the details for the third quarter.

And finally -- and with apologies for ending on a down note -- we come to TreeHouse Foods, and Credit Suisse's decision to downgrade it this morning.

Yesterday, the soups-and-sauces purveyor "missed earnings" by a significant margin, reporting $0.70 per share in profit, versus the $0.78 that Wall Street had hoped to see. Revenues also came in light, and TreeHouse's in-line guidance for the year tells us the company has little chance of making up lost ground in the current quarter. That being the case, projections of long-term earnings growth coming in at 11% seem too little to justify the company's near-19-times earnings valuation.

Long story short, Credit Suisse is probably right to be rating this one an "underperform."

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Fossil. Motley Fool newsletter services recommend Fossil.

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