This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Stifel quits smoking
About a month ago, I took a look at Altria's (NYSE: MO  ) plans to conduct a $1 billion stock buyback and argued that shareholders were getting a good deal. The stock wasn't exactly a screaming buy, but considering that the options for boosting sales growth were limited, deploying cash to reduce the share count and improve per-share earnings looked like a pretty good way to maximize shareholder value.

About a month later...that's exactly what has happened. Earlier this week, Altria shares topped a new 52-week high, briefly touching $29.25 per share as investors continue to light up the "buy" button for Altria stock.

Now, this is gratifying to see, certainly. I caught some flak, you see, for saying I preferred Altria's buyback plan over similar repurchase announcements at Mosaic (NYSE: MOS  ) and Sysco (NYSE: SYY  ) , both of which are weaker free cash flow generators.

But Altria's success does pose a dilemma. Seven percent more expensive than they were just a few weeks ago, Altria shares have moved from "fairly priced" a month ago to "somewhat pricey" today. It's a fine distinction, but it has produced an unfortunate effect, in that the shares' price rise sparked a downgrade to hold yesterday at Stifel Nicolaus.

Stifel sees the "fundamentals" as remaining intact for Altria -- good cash flow, good progress on a plan to cut costs, and minimal risk of state taxes on cigarettes rising in 2012. That said, according to the analyst, "recent strength in the share price has pushed its valuation up to a level that we believe allows for less aggressive upside." Or more simply put, the shares are fully valued -- maybe even a bit overvalued, and there's no compelling reason to buy today.

Me, I'm not so sure.

What about the buyback?
Consider: Updated numbers from our financial data providers now show Altria to be trading for about 17 times annual earnings and 17 times annual free cash flow as well. Ratio-wise, that's actually cheaper than the stock appeared when I looked at it a month ago. At 17 times earnings, for example, the stock sells for a lower P/E ratio than do Reynolds American (NYSE: RAI  ) or British American Tobacco (AMEX: BTI  ) , which sell for 18 and 18.6 times earnings, respectively, and it's much cheaper than unprofitable Star Scientific (Nasdaq: CIGX  ) -- which doesn't even have a P/E. Altria also pays a better dividend than any of these three rivals.

When you consider the savings on dividend checks that Altria will accrue by reducing its share count, I still believe Altria shares are cheap enough to be worth buying. But even if the shares' spike in price has you rethinking that, remember that Altria has given itself a full year in which to spend its $1 billion on buybacks. That's plenty of time, and gives the board plenty of flexibility, in which to pick and choose the times at which it buys back shares to get the best prices. If you're in the market for Altria shares yourself, I'd suggest doing likewise.

Foolish takeaway
While I take issue with its overvaluation argument, on balance I probably agree with Stifel Nicolaus on more points than I differ. Altria is right on the cusp of being "fairly priced." Still, chances are good that this stock will go on sale more than once over the course of the coming year. At today's valuation, I'd be more inclined to buy Altria by the pack, rather than the carton.

If you're looking for a more aggressive buy, I'd point you instead to Altria's separated-at-birth sibling, Philip Morris International (NYSE: PM  ) . Here we've got a 16 P/E stock growing at 12%, and paying a 4% dividend -- the very definition of a fairly priced stock. Its advantage is that while Altria generates slightly more free cash than it reports as net earnings, Philip Morris hacks up gobs more cash -- $10.4 billion FCF, versus reported net income of just $8.5 billion. Of the two, I believe it's the better bargain.

Does your conscience rebel at the thought of investing in "sin stocks"? There's nothing wrong with that. Not everyone's cut out to be an amoral, cutthroat capitalist. If you lean more toward a socially responsible approach to investing, take a look at the portfolio that my Foolish colleague Alyce Lomax is putting together under The Motley Fool's Rising Stars portfolios. It's chock-full of green stocks, shareholder-friendly managers, and employee-friendly workplaces -- and it's thrashing the S&P 500's returns to boot!