Wednesday's Top Upgrades (and Downgrades)

Stocks go up, 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. This morning, Wall Street was feeling mighty optimistic, so we'll be examining the new buy ratings that have just come out on Dunkin' Brands (Nasdaq: DNKN  ) , SandRidge Energy (NYSE: SD  ) , and finally, Aastrom Biosciences (Nasdaq: ASTM  ) .

And we're off!
Attacking these ratings in first (worst) order, we begin with Aastrom Biosciences, a pioneer in the field of stem cell research. This morning, Aastrom got a buy rating from the folks at Ascendiant Capital. With a name like "Ascendiant," you'd expect these analysts to be an optimistic bunch, and you'd be right. Because Ascendiant didn't just give Aastrom any old buy rating, but a strong buy, and a $4.25 price target that values the stock at nearly twice its current market cap.

Why? According to StreetInsider.com, Ascendiant is picking Aastrom primarily out of faith in its "key product, ixmyelocel-T ... an autologous, bone marrow-derived cell therapy product being developed for the treatment of critical limb ischemia (CLI) and dilated cardiomyopathy (DCM)." The therapies are currently undergoing Phase 3 and Phase 2 trials before the FDA, respectively. If they succeed, the days of people like me mocking Aastrom as a profitless, near-revenueless R&D shop will be at an end.

So let's get while the getting is good: So far, Aastrom has no profits. Its revenues over the past 12 months were a mere $11,000 -- and no, I didn't misplace a decimal. 11K, period. So while it's possible Ascendiant is right about Aastrom, that its drugs will be blockbusters and the stock is a resounding success, for now the jury is out. Buying shares of this company isn't investing. It's speculation, pure and simple.

Less quicksand at SandRidge
Somewhat better is the news at natural gas developer SandRidge Energy, which this morning received a more muted upgrade to hold. Canaccord Genuity is the analyst behind this one, and according to Canaccord, the reason to consider holding onto SandRidge today is basically because the analyst's previous recommendation (sell) has played out as predicted. With nat gas prices still depressed, SandRidge's stock price is down 30% since February, leaving "minimal downside" left in the stock.

What debate there remains, it would appear, is over whether SandRidge can reach free-cash-flow-breakeven (i.e., generate enough cash flow to pay for the investments it must make in its business) by 2014. SandRidge says it can. Canaccord says it can't, and will likely keep on "outspending cash flow by $1+ billion per annum for the foreseeable future."

With $2.7 billion in net debt already, that prospect would be bad news for SandRidge if it turns out Canaccord is right. On the other hand, if SandRidge knows its business better than the analyst does -- or if nat gas prices rebound to more historically normal levels -- the stock could turn around in a jiffy. In this context, a "hold until believed" stance on SandRidge seems appropriate.

And the first comes last
And finally, we come to a more familiar name -- because after all, America runs on Dunkin'. The shares are also taking a bit of a jog (up) this morning after being upgraded to buy by analysts at Argus. According to Argus, "solid domestic and international growth opportunities" argue in favor of jumping into Dunkin' today.

Investors had better hope Argus is right about that, though, because elsewhere on Wall Street, the consensus is that Dunkin' will be lucky to achieve 16% long-term growth over the next five years. For a stock that costs 31 times free cash flow today, and 63 times earnings, that's probably not going to be solid enough to support the stock price.

In the end, if you're looking for a great stock at a bargain price... Dunkin' Brands probably isn't it. Time to bake some better investment ideas, Argus.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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