Tuesday's Top Upgrades (and Downgrades)

Stocks go up and stocks go down -- and so do analysts' opinions of them. 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'll examine diverging ratings moves on insurers Hartford Financial (NYSE: HIG  ) and Prudential (NYSE: PRU  ) and a new upgrade for Colgate-Palmolive (NYSE: CL  ) .

Hartford hailed...
Good news first. Shares of Hartford Financial are reacting positively to an upgrade to "buy" from investment banker Stifel Nicolaus this morning. Citing a low share price and a potential unit sale, Stifel argues Hartford shares -- currently at $19 and change -- could hit $24 within a year. A 25%, one-year profit, with a 2% dividend kicker? Sounds pretty good, but how likely is it?

Unfortunately, not very. You see, Hartford shares are down 30% over the past year, and as much as we'd like to say otherwise, such declines usually have a reason. In Hartford's case, one big reason the shares are struggling is that the company's combined ratio -- the amount of money it pays out every year to satisfy claims, as a percentage of what it takes in as premiums from clients -- has been rising steadily these past couple of years. Last year, Hartford paid out more money than it took in, with the result that even factoring in gains on its investments, profitability was so weak that the stock's P/E ratio now sits at a lofty 35 times earnings.

As far as the underlying business goes, Hartford is still struggling.

...while Prudential gets rocked
Not so with Prudential. Like Hartford, the "Get a Piece of the Rock" company boasts an enticingly low forward P/E ratio. But unlike Hartford, this financial services company looks cheap based on how its business is already performing. Priced at about 12 times earnings (cheaper than Hartford), but growing faster and paying a larger dividend yield, Prudential shares look like a bargain.

And yet, according to Briefing.com, analysts at Argus chose this morning to inexplicably downgrade Prudential shares. Literally inexplicably. No major media outlets seem to have details on why the downgrade happened. Just that Argus, previously a fan of Prudential, now thinks the stock's a "hold." Absent a compelling explanation, investors should probably take this downgrade for just what it is: an opportunity to pick up cheap shares of a quality insurer.

And speaking of cheap shares...
Argus may be wrong about Prudential, but at least it's ... also wrong about a completely different stock. After sitting on the sidelines and watching Colgate-Palmolive rush past the S&P 500 to post a 15% gain over the past year, Argus has finally decided the stock is cheap enough to "buy."

Unfortunately, it's wrong about that. After its run-up, Colgate shares now cost a princely 20 times trailing earnings. On one hand, this is more than rivals Johnson & Johnson, Clorox, or Procter & Gamble will cost you. On the other hand, it's completely out of whack with Colgate's growth prospects, which most analysts put at just over 9% per year for the next five years, about 5% lower than the S&P 500.

Sure, Colgate operates in a "safe" sector of the market -- consumer goods that people buy in good times and bad. Sure, Colgate pays a nice 2.5% dividend. But if it's dividends you seek, each of J&J, Clorox, and P&G beats Colgate's payout by at least one full percentage point. And if it's value you're after, 20 times earnings for a single-digit grower is anything but a bargain.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Johnson & Johnson and Clorox. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Procter & Gamble. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson.


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