Monday's Top Upgrades (and Downgrades)

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our top trio of newsmakers includes newly buy-rated eBay (Nasdaq: EBAY  ) and Groupon (Nasdaq: GRPN  ) , and now-downgraded Tractor Supply (Nasdaq: TSCO  ) . Let's plow right in.

eBay: Buy it now?
First up, analysts at Keefe, Bruyette & Woods initiated coverage of eBay with an outperform rating this morning. Calling the company "a leader in e-commerce," KBW slapped a $50 price target on the $42 stock, predicting that earnings and sales will benefit from renewed economic growth.

If only this were true. The numbers, however, tell a different tale. Priced at 16.6 times earnings today, eBay shares already look expensive relative to consensus estimates of 13% long-term growth. But worse than that, the earnings that eBay does make are of pretty low quality. Actual free cash flow at the company for the past 12 months came to just over $2 billion, or less than 62% of reported net income.

As a result, the company's price-to-free-cash-flow ratio sits well into the mid-20s, and far too high to be sustained by a mid-to-low-teens growth rate like the one eBay sports. In short, with shares up 41% over the past year, the easy money has been made already. If eBay's shares are headed anywhere in the future, then that direction will be down.

Groupon: A better daily deal?
Investors can find a better bargain in the form of Morgan Stanley's new "overweight" recommendation, Groupon. Sure, on the surface Groupon doesn't look nearly as attractive as eBay. It's not yet reporting positive earnings, and its shares are down more than half from their IPO price.

But underneath, things look much brighter for Groupon. The firm sports trailing free cash flows in excess of $310 million, and is growing smartly. Analysts on average expect to see 31% annualized profits growth at Groupon, a rate more than twice as fast as larger eBay is expected to be able to grow.

With a rock-solid balance sheet sporting more than $1.1 billion cash and no debt, and a valuation of less than 24 times annual free cash flow, Groupon looks like a much better bargain than eBay. If it's cheap, high-quality earnings you're after, therefore, go ahead: Buy it now.

Quit posing. You're no farmer
If eBay owners are disappointed to learn that their stock is a dog, then they can at least take some comfort in knowing... it's not as big a dog as some other stocks getting slammed by Wall Street this morning. Tractor Supply, for example.

The retailer got hit with a downgrade to "hold" from the folks at KeyBanc Capital Markets this morning. With shares up 38% over the past year, KeyBanc says the "risk/reward profile has become more balanced" lately -- which may be the understatement of the year.

KeyBanc calls the shares "expensive" at 26 times earnings, and like eBay, Tractor Supply is actually a whole lot more expensive than it looks. Free cash flow at this farming supplies retailer comes in at a meager $110 million, far below the near $245 million haul claimed on the company's earnings statement.

Tractor Supply is growing quickly, no doubt. KeyBanc believes the company will eventually nearly double the size of its operations off a base of 1,119 stores today. But at 57 times annual FCF, the stock is far too expensive to risk owning -- even if all goes right, and Tractor Supply achieves its consensus growth target. If, on the other hand, management hits even one small pothole on the growth path, the wheels could come totally off. Caveat investor.

Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of eBay.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1916052, ~/Articles/ArticleHandler.aspx, 5/30/2016 3:00:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 17,873.22 44.93 0.25%
S&P 500 2,099.06 8.96 0.43%
NASD 4,933.51 31.74 0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/27/2016 4:00 PM
EBAY $24.36 Up +0.24 +1.00%
eBay CAPS Rating: ****
GRPN $3.55 Up +0.07 +2.01%
Groupon, Inc. CAPS Rating: *
TSCO $96.75 Up +1.01 +1.05%
Tractor Supply Com… CAPS Rating: ****