This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Unfortunately for investors -- and contrary to what you might expect considering the election results out of Greece -- most of the talking is down, as analysts take an ax to the ratings at Celgene (Nasdaq: CELG  ) and Huntsman (NYSE: HUN  ) , and do a real number on the numbers at II-VI (Nasdaq: IIVI  ) .

Time to sell Celgene?
Analysts at RBC Capital Markets aren't quite ready to recommend selling Celgene -- but they're not far from it. RBC cut its rating to "sector perform" this morning, and knocked the price target down to $72.

Granted, this move still seems to leave room for 9% upside in the stock, and not everyone's as pessimistic as RBC. Wells Fargo, for example, just had a meeting with management and came away impressed. In a note that came out shortly after RBC's downgrade, Wells reiterated its belief that the stock will "outperform" the market, arguing that Celgene's Revlimid "is poised for solid growth in Q2," which was already working out pretty well in any case.

On balance, Wells seems to have the better argument here. Priced at 20.5 times earnings, and with free cash flow that's superior even to reported earnings, Celgene shares look attractively priced even if they should fall a bit short of consensus expectations for 25% growth. If Wells is right -- if it didn't just get snookered by management happy talk -- and growth is going as planned, the stock could very well be a "buy" at today's prices.

KeyBanc and the Huntsman
A second bargain in the making, but getting unmade on Wall Street, could be Huntsman Corp. The specialty chemicals maker sports a zippy 17% earnings growth rate, a generous 3.1% dividend, and a bargain-basement P/E of less than 9. KeyBanc, however, worries that "the Company's exposure to Europe and slowing growth rates in China coupled with its above average leverage will likely weigh on shares in the near term, limiting upside potential." (And indeed, with $3.4 billion in net debt, Huntsman is pretty heavily leveraged, with a higher debt-to-capital ratio than Dow Chemical (NYSE: DOW  ) , which carries a $17 billion net debt load yet seems to have no trouble getting investors to pay nearly 18 times earnings for its shares.)

KeyBanc also worries that earnings at Huntsman aren't all they're cracked up to be, and projects profits that are "now well below consensus." There's more concern here, given that free cash flow at the company is a bit weak relative to reported earnings. That being said, $328 million in trailing free cash flow is nothing to sneeze at (even proverbially), and Huntsman has shown itself able to generate even more free cash flow than this when the economy cooperates.

On balance, I think the rewards still outweigh the risks here. Debt's an issue, sure, but with Huntsman shares costing less than 9 times earnings, I think the downside here looks pretty limited.

I see a cliff
Speaking of downside risk, investors in laser components maker II-VI got an up-close and personal introduction to the concept last week when a weak Q4 and fiscal 2013 forecast sent its shares skidding over a cliff. This morning, analysts at Longbow are rubbing a bit of salt into shareholders' wounds as they lop $7 off their price targets for the stock (about a 26% reduction).

That's pretty bad news, but there's worse to come. At 15 times earnings, II-VI still looks too expensive for the 13% long-term growth that Wall Street is forecasting. Meanwhile, free cash flow at the firm looks positively anemic at just $26.7 million, or less than 40% of claimed net income. Priced at a whopping 38 times annual free cash flow, II-VI shares look to have a whole lot of downside left in them, and little chance of returning to even the $20 price target that Longbow now assigns the stock.

Foolish takeaway
What's that? Oh, yes, Longbow still does recommend buying the stock, just as it recommended buying before Friday's rout. But after what happened to II-VI last week, how eager are you to follow Longbow over the cliff once again?

My advice: There are stocks out there that will profit from the new industrial revolution (and you can learn about three of them in our new Fool video report -- view it here). II-VI, however, isn't one of them.

Whose advice should you take -- mine, or that of "professional" analysts like RBC, KeyBanc, and Longbow? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

The Motley Fool owns shares of II-VI, and Motley Fool newsletter services have recommended buying shares of II-VI, but Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 342 out of more than 180,000 members. The 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.


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