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. Today, upgrades are on tap for Dick's Sporting Goods (NYSE: DKS  ) and Groupon (Nasdaq: GRPN  ) , but there's a bit of a mixed can for Sherwin-Williams (NYSE: SHW  ) .

Rather sporting of you, old chap
Major banker Wells Fargo starts us off this morning with a round of applause for Dick's Sporting Goods, a $48 stock that, according to the analyst, could run as high as $55 over the course of the next 12 months.

This isn't exactly surprising. As Wells itself admits, its estimates for Dick's earnings over the next 12 months are already "above consensus estimates," so clearly the banker believes Dick's is underestimated. According to the analyst, the pullback in share price (which only recently topped $50) "makes valuation look more compelling" and justifies a buy at today's levels. But does it, really?

Wells believes we will soon see evidence of "a reacceleration in sales within the athletic apparel and outdoor/hunting/fishing categories" at Dick's. But already, the company grew sales 15% in the most recent quarter and earnings grew 52%. It's hard to see how this retailer can grow much faster than that, especially in light of Wells' own concerns about "a more aggressive effort by" Amazon.com (Nasdaq: AMZN  ) challenging Dick's supremacy in sporting goods. Long term, most analysts believe the company will fall just short of 16% earnings growth each year, and at a P/E ratio of 21 already, that may not be fast enough to support the stock price as it stands -- much less drive Dick's higher.

Not as bad a deal as it looks
In other retail news, investment banker Stifel Nicolaus canceled its sell rating on Groupon this morning, and upgraded the stock to hold. While admitting that sentiment on the stock remains negative, Stifel sees the potential for "growth areas [to] develop" at Groupon over the next several months.

Considering that sales were up 89% already last quarter, this suggests some serious momentum is building at Groupon. And while it's true that the company is currently considered unprofitable by GAAP accounting standards, most analysts believe Groupon will not only earn a profit next year, but earn so much profit as to knock its P/E ratio down to just 15.

For a company pegged for 31% long-term earnings growth, that's more than just a "daily deal." It could be the bargain of the century.

Success is its own punishment
Last but far from least, we turn to Sherwin-Williams, the subject of a downgrade to underperform from neutral by Bank of America this morning. This probably sounds like bad news for Sherwin-Williams and for investors counting on a new boom in the housing market alike. But in fact, it's not really as bad as all that.

Sherwin shares, you see, have gained more than 56% over the past 52 weeks, surpassing even B of A's bullish $122 price target. That's been great news for Sherwin shareholders, of course. But today, selling for "a 63 percent premium against peers in the coatings industry," B of A sees "little room for error" in the stock price. Deciding therefore that discretion is the better part of profit, B of A is advising investors who've profited from the stock already to not get greedy -- take some winnings off the table and wait for better prices before buying more.

That seems like sound advice. After all, at 29 times earnings, Sherwin's shares are looking a bit richly priced, even for the 16% long-term annual growth that Wall Street ascribes to the company. Investors looking for a new home for their money might be better advised to consider a company that hasn't run up quite so far, quite so fast -- PPG Industries (NYSE: PPG  ) for example. At 18 times earnings, the stock is no obvious bargain itself. But its strong free cash flow (which reduces the price-to-free-cash-flow ratio to 13), less ambitious growth goals (13%), and superior dividend yield (2.3%) suggest PPG has more room to grow.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Dick's Sporting Goods and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com and Sherwin-Williams.


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