Tuesday'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, we've got mostly happy news to report, as analysts up their price targets on Herbalife (NYSE: HLF  ) and Meritage Homes (NYSE: MTH  ) , and give an honest-to-goodness upgrade to ExactTarget (NYSE: ET  ) .

Start your day with a chuckle
Every time I see the word Herbalife, I can't help but smile. It reminds me of the time I saw a poster glued to a lamppost in Moscow, advertising the nutritional-supplement maker's products -- and in the Cyrillic alphabet, it seemed to be singing the praises of "Gerbil-Life." Today, Herbalife shareholders are smiling for another reason entirely: After beating earnings by nearly 10% yesterday, Herbalife is winning praise from investment banker Caris & Co.

Already on record in favor of Herbalife, yesterday's results convinced Caris more than ever that Herbalife is a buy. Now the analyst is upping its price target on the stock by $3, to $86 a share -- implying a potential 26% gain.

Unfortunately, that number looks a tad optimistic. At $68 a share, Herbalife already costs 18 times earnings. For a company that most analysts think will grow only about 14.4% per year going forward, that's expensive. Plus, Herbalife disappointed investors when, after reporting strong earnings for Q1, it predicted Q2 earnings that will fall short of Street estimates -- suggesting the growth rate analysts expect may not materialize. The stock's not so wildly overvalued as to demand that investors sell it right away, but it's not much of a bargain, either.

A recovery in homebuilding?
Speaking of stocks that are no bargain, let's move on to Meritage Homes. The Arizona-based homebuilder got a boost to its share price last week after reporting improved revenues and a narrowed quarterly loss, alongside net sales orders that jumped 36% year over year.

These numbers missed estimates, but were good enough to convince FBR Capital (neutral on the stock) to up its price target for Meritage by 7%, to $29 per share. Are the shares worth it?

True, Meritage sports one of the lower price-to-book value ratios in the industry -- 1.9, versus 2.0 for Pulte or 2.2 for Ryland. Even so, unprofitable and priced at 19 times next year's earnings, Meritage shares look to be priced at a premium to Wall Street forecasts of 7% long-term earnings growth. The stock may be OK for housing-industry-revival speculators. Value investors, however, are best advised to stay away.

Gunning for growth
Speculators, value investors... but what about growth investors? No fewer than three Wall Street analysts announced today that they've found a stock for them as well: Internet marketer ExactTarget. On Tuesday morning, Stifel Nicolaus, Canaccord Genuity, and RBC Capital Markets initiated new buy ratings on this March IPO.

And if you're wondering if they perchance had any connection to said IPO -- why, yes! As a matter of fact, they all did. Stifel, Canaccord, and RBC helped underwrite the IPO. Expect new buy ratings from fellow underwriters JPMorgan, Deutsche Bank, et al., in short order.

As for why anyone else would want to own ExactTarget, well, the main attraction here appears to be the growth rate. Last quarter, ExactTarget grew quarterly revenue 53% year over year. Profit growth wasn't quite as strong. In fact, the opposite is more accurate, as ExactTarget's trailing loss is now close to three times as big as what it booked in fiscal 2010. Still, I'll give the analyst this much: They've certainly found themselves a growth stock in ExactTarget.

The only problem is that what's growing are the losses.

Fool contributor Rich Smith holds no position in any company mentioned, but Motley Fool newsletter services have recommended buying shares of Meritage Homes. The Motley Fool owns shares of JPMorgan Chase.


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