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, we'll look at why one analyst is shopping at Whole Foods (NYSE: WFM  ) while another writes a sell-script for Walgreen (NYSE: WAG  ) and Argus lifts a glass to Jim Beam (NYSE: BEAM  ) .

Going all-in for "Whole Paycheck"
First up, Cantor Fitzgerald issued a positive research note on Whole Foods this morning. As StreetInsider.com reports, the analyst exults over "flawless" results at Whole Foods, ranging from "strong comps" to "improvements in shrink" (i.e., less shoplifting), "lower occupancy costs, and strong leverage of direct store expenses." All this has Cantor predicting a future full of earnings beats and raised profits guidance.

Be that as it may, savvy investors will note that Whole Foods stock is up 70% in the past 12 months, and must wonder: Is the good news already priced in? After all, at 43 times earnings, even the 18% long-term earnings growth that Wall Street is banking on may not be enough to justify Whole Foods' high price tag.

With strong free cash flow, growing earnings, and a fortress-like balance sheet, Whole Foods is clearly a quality stock. Just make sure you don't spend your whole paycheck on this single stock. Flawless execution is all well and good, but once a stock gets priced for perfection, as Whole Foods now is, the slightest stumble could send stock shoppers running for the exits.

You spent how much?!
Speaking of high price tags, Wall Street is undergoing a bit of a rebellion over Walgreen's decision to pay $6.7 billion for a 45% stake in Britain's Alliance Boots, a price that could rise to $16.2 billion if Walgreen elects to buy the whole company in three years. As The Wall Street Journal reports, this is great news for private equity powerhouse KKR (NYSE: KKR  ) , which paid $17.2 billion for Boots at the height of the going-private craze of 2007, and looks likely to get bailed out of that mistake now by Walgreen. It's less-good news for Walgreen itself, however.

Responding to the news, analysts at Argus Research cut Walgreen to "hold." Citigroup went a step further, cutting $2 off its target price (now $27) for this already sell-rated stock. The big worries here appear to focus on Walgreen's lack of experience integrating major acquisitions into its business, and also the location of this particular acquisition. In case you haven't heard, economies aren't exactly booming in Europe these days, and Boots' stomping ground is right smack dab in the middle of the trouble, in England.

The good news? At less than 10 times earnings, with a growth rate of nearly 10%, and a dividend yield that approaches 4%, Walgreen's stock is so cheap that it could afford to overpay for Boots and botch the integration, and the stock would still be cheap. If, on the other hand, all goes swimmingly, that'll be icing on the cake for Walgreen investors.

It's positively whiskey-licious
Perhaps hoping to drown its depression over the price tag of the Walgreen deal, Argus has a second recommendation for investors today. Unfortunately, this one may leave you questioning the analyst's sobriety. According to Argus, the stock to buy today is Jim Beam, or, as it's known officially these days, Beam.

Now at first glance, picking up a bottle of Beam before noon may look like a good idea. The stock costs only 11 times earnings after all, while its growth rate is a respectable 12%. Problem is, Beam only generated $456 million in free cash flow over the past 12 months, versus the $909 million in net income the company claimed to earn under GAAP accounting standards. This means that while on the surface, Beam looks attractive, its actual price-to-free cash flow is about twice as pricey as you'd expect: 21.9.

Long story short, Beam stock is just chock-full of empty calories. Tempted as you might be to pick up the bottle, it's simply not a good idea.

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Beam and Whole Foods Market.


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