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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Today, we're going to take a look at three high-profile ratings moves on Wall Street: a significant downgrade for SandRidge Energy (NYSE: SD  ) , balanced out by a price-target hike for lululemon athletica (Nasdaq: LULU  ) , and a brand new buy-endorsement for Savient Pharmaceuticals (Nasdaq: SVNT  ) . Let's dive right in.

SandRidge sandbagged
Bad news first: If you own shares of oil and gas company SandRidge Energy, you shouldn't. At least, not in the opinion of Canaccord Genuity, which just downgraded the shares to "sell."

So far, SandRidge has succeeded in spinning off two subsidiaries, SandRidge Mississippian Trust I  (NYSE: SDT  ) and SandRidge Permian Trust (NYSE: PER  ) , in an effort to raise funds to continue supporting its cash-burning business. Problem is, no sooner had the company done so than it quickly turned around and spent $1.3 billion to purchase privately held Dynamic Offshore Resources, sparking a sell-off in the stock.

Why all the negativity? Canaccord explains that SandRidge's madcap cash maneuvers are emblematic of a "chronic liquidity challenge" at SandRidge. While management argues that buying Dynamic will help it move toward free-cash-flow breakeven by 2015, Canaccord crunched the numbers and came to a different conclusion: Despite its best intentions, SandRidge will remain FCF-negative in 2015, actually burning $1 billion. The analyst calls the company "severely stressed" and advises investors to sell it.

A doozy of a price hike for lulu
In happier news, ace stockpicker Stifel Nicolaus gave a big vote of confidence to lululemon athletica this morning. Shares of the capitalization-challenged yoga apparel specialist are trading at an all-time high, but Stifel thinks they're bound to go even higher. The analyst is raising its price target on the stock 10% to $77 per share.

Is it worth it? I'm not so sure. Lulu shares already cost 61 times trailing earnings, or 43 times the $1.59 per share lulu is expected to earn in 2013. That seems pretty pricey, even if lulu manages to hit the 29% earnings growth rate Wall Street has it pegged for. Plus, right now lulu is generating only about $0.22 in free cash flow for every $1 in "earnings" claimed on its income statement. Valued on free cash, the shares are trading for upwards of 260 times FCF.

I'm not saying Stifel's wrong, mind you. Overpriced shares can certainly get more overpriced -- but I wouldn't rush out to buy lulu on Stifel's say-so, just the same.

Savient: A savvy buy?
While we're on the subject of overpriced, cash-burning companies: Savient Pharma got a "buy" recommendation of its own this morning, when analyst William Blair initiated the stock at "outperform."

Savient "missed earnings" earlier this week, reporting a $0.44-per-share loss, versus the expected $0.38 deficit. (On the bright side, revenues for the fiscal fourth quarter came in ahead of consensus at $3.71 million.) Management declined to provide its shareholders with an update on cash burn in its press release, but it did admit in its SEC filing that negative free cash flow doubled in comparison to last year. Result: Savient's balance sheet now shows a net debt position, and the company is burning cash at the rate of $117 million a year. That may sound like a "buy thesis" to Blair. It doesn't to me.

Whose advice should you take -- mine, or that of "professional" analysts like Canaccord, Stifel, and Blair? Check out my track record on Motley Fool CAPS and compare it to theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on five dozen other companies. Check them out on the Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and is currently ranked No. 402 out of more than 180,000 CAPS members.

The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services have recommended buying shares of lululemon athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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