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

So 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 pair of new buy ratings for Activision (Nasdaq: ATVI  ) and Electronic Arts (Nasdaq: EA  ) , and a price-target increase for Alcoa (NYSE: AA  ) ... but a downgrade for Bank of America (NYSE: BAC  ) . Let's dive right in.

EA and Activision: Easy A's?
Just when you thought Activision Blizzard's globe-striding World of Warcraft franchise couldn't get any bigger, the big A announces plans to make it do just that. Yesterday, the company confirmed that it has a version of the game in the works that will run on mobile devices. The news helped lift the stock yesterday -- and that's not the only reason to like it. This morning, ace stock-picker Stifel Nicolaus announced that it's starting a new buy rating on Activision, citing a "robust" pipeline of new games and, in particular, "upside" offered by the company's new "E for everyone"-rated Skylanders.

Nor is Activision the only "easy A" Stifel thinks you can score in gaming. Simultaneously with this rec, Stifel endorsed Electronic Arts based on the potential for its Star Wars MMORPG to become "a share-price catalyst." Both companies generate copious free cash flow and sit on large piles of cash. Of the two, though, Activision sports the lower P/E ratio, while, according to consensus estimates, EA has the advantage in growth.

At current valuations, neither stock looks like a huge bargain. Activision sells for an enterprise value-to-free cash flow ratio of 12.3, while EA sports an extremely optimistic 45 EV/FCF ratio. For this reason, if you're inclined to follow Stifel's advice, I'd say Activision offers the closest thing to a bargain price (an opinion I've made publicly on CAPS -- and I'm sticking to it). EA ... isn't quite there yet.

"Can" Alcoa go higher?
I'm even less enthused with Stifel's other idea this morning -- the decision to raise its price target on Alcoa. On one hand, the stock doesn't look all that bad of a bargain, based on its 18.5 P/E ratio but rapid 20% long-term growth potential. The problem with Alcoa, though, is that it's a stock that always seems to be on the cusp of a recovery. That sounds good ... except for the implication that it never actually does recover. Profits at the company have averaged 34.5% annual declines over the past five years (according to Yahoo! Finance), and despite generating pretty decent free cash flow last year, the stock's still hip-deep in debt -- about $7.5 billion net of cash on hand.

Call me a pessimist, but Alcoa just feels like a value trap to me. I'd avoid it.

Bank against America?
In contrast, at close to 1,000 times earnings (seriously), Bank of America is the furthest thing from a value trap ... or a value of any sort for that matter. After watching the stock gain 80% this year, somewhat fueled by happy news from the banking stress tests, Robert W. Baird believes investors shouldn't push their luck any further. The analyst is revoking its "outperform" rating on B of A stock and downgrading to neutral.

Is that wise? I mean, yes, at 900-plus-times earnings, the stock's clearly pricey on a trailing basis -- but its forward P/E ratio is just 9, and the stock's selling for less than half its book value. A lot of very smart investors seem to like what they see at B of A. But as I explained last week, I'm not just worried about how European banks like Bank of Ireland (NYSE: IRE  ) will fare in this crisis. I'm leery of all banks that may have European risk hidden within their balance sheets, and wouldn't touch 'em with a 10-foot pneumatic tube.

My advice: If you believe that Greece (and the rest of Europe) is out of the woods now, that B of A will sidestep any losses from across the pond, and that all's well with the U.S. economy, too, go ahead and buy the stock. If not, don't.

Not all banks are bad bets, though. There are some smaller players with enormous upside. In fact, they're The Stocks Only the Smartest Investors Are Buying. Learn more and uncover these top picks today.

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

Fool contributor Rich Smith owns shares of Activision Blizzard. He does, however, have public recommendations available on more than 50 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle TMFDitty -- and is currently ranked No. 374 out of more than 180,000 CAPS members. The Motley Fool owns shares of Bank of America, Bank of Ireland, and Activision Blizzard and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of and creating a synthetic long position in Activision Blizzard. We Fools don't 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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  • Report this Comment On March 28, 2012, at 1:39 PM, ronbeasley wrote:

    Another Motley Fool subscription salesman (not to be confused with an investor) who wants to convince you that he knows more than Wilbur Ross and Prem Watsa, two billionaires with huge investments in Bank of Ireland.

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