Thursday's Top Upgrades (and Downgrades)

Stocks go up, stocks go down -- and so do analysts' opinions of them. This series looks at which upgrades and downgrades make sense, and which ones investors should act on. This morning, we have two "ups" making headlines -- Monster Beverage (Nasdaq: MNST  ) and Cree (Nasdaq: CREE  ) -- and one more that's heading down: Cisco Systems (Nasdaq: CSCO  ) . Let's dive right in.

A Monster quarter
Shares of energy-drink braumeister Monster Beverage are bubbled higher today in the wake of a Q1 earnings report that featured beats on both revenues and earnings. And analysts, never shy about pointing out the stocks they're right on (you'll be shocked to learn that they're not, in fact, always right), took a victory lap this morning, as both Stifel Nicolaus and UBS hike their price targets in response.

Explaining its move, UBS is quoted on StreetInsider.com as praising "a significant shift
in margin structure with Monster employing operational efficiency programs and enjoying scale benefits. With this, we are increasing our 2012E and 2013E EPS to $2.11 and $2.72 ... and increasing our [price target to] $82."

Exciting news? Maybe a bit too exciting. What UBS is saying is that it now thinks Monster shares are worth 30 times what they're expected to earn next year. Yet over the long term, most analysts doubt Monster will be able to keep the growth machine gunning much faster than 15% annually. This makes for happy shareholders today -- but it increases the risk of pain tomorrow, when reality inevitably sets in.

Cree lights up
In related pricey stock news, Stifel Nicolaus has just initiated coverage of LED lighting specialist Cree at "buy." Priced shy of $32 today, Stifel sees Cree rising to $38 within a year, representing a 19% upside to investors from today's prices. But what are the chances investors will see those profits, really?

At 66 times earnings, Cree's priced at about triple the level you'd ordinarily expect of a stock growing at 21% (as it is). On the plus side, though, Cree recently found the "on" button for its cash machine and in the past year has generated free cash flow at about twice the rate it reported net income under GAAP. Result: Priced at roughly 32 times free cash, the stock's not quite as expensive as it looks. Management will, however, need to find a way to juice the growth rate a bit if it hopes to justify the stock's still-rich valuation. That, or the stock needs to go lower before it goes higher. (And lucky for new investors, that's just what Cree's share price did today -- dropping as much as 3.5% despite the "buy" rec.)

Is Cisco a bridge to nowhere?
So far we've looked at two buy recommendations that to me don't really stand up to scrutiny. But are there any bargains to be had in the markets today? Actually, yes, and as you might guess by now, it's in a stock that Wall Street loathes: Cisco.

The Internet-backbone builder reported revenues and earnings that beat Street estimates last night, with revenues up 7% and profits up twice that. So what's the problem? Guidance.

Cisco says its revenues will rise at most 5% in the upcoming fiscal fourth quarter, less than expected, with earnings also coming in a bit light. It's hardly world-ending news, but try telling that to Wall Street. So far, no fewer than five analysts -- FBR, Mizuho, Oppenheimer, Stifel, and UBS (yes, those two again) -- have cut their price targets on Cisco, positing anywhere from a $20 to a $23 share price one year from now. Investors, spooked by the negative sentiment, are selling Cisco off to the tune of 10%, driving shares down south of $17.

This is, quite simply, insane. Cisco just reported numbers that bring trailing profits to $7.4 billion and free cash flow to a monster $10.1 billion. Factor in Cisco's Smaug-like treasure hoard of $32 billion net of debt, and this business is now selling at only 5.8 times its trailing 12 month EBITDA. This for a company that's still expected to grow at better than 8% per year over the next half-decade and that pays investors a 1.7% dividend. If you were looking for a chance to own Cisco at bargain basement prices, Wall Street just handed it to you on a silver platter.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Cisco Systems. Motley Fool newsletter services have recommended buying shares of Monster Beverage. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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