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.

Today, we've got a new buy rating for Phillips 66 (NYSE: PSX  ) on tap, followed by a downgrade for Penn West Petroleum (NYSE: PWE  ) , and finally good news for VIVUS (Nasdaq: VVUS  ) shareholders, and American dieters. Let's dive right in.

Get your kicks on Phillips 66
Shares of oil refiner Phillips 66 have traveled a rocky road since being spun off by parent company ConocoPhillips (NYSE: COP  ) a few months ago. After initially spiking, the shares plunged as low as $29 a stub in early May, then bounced around some more before finally finding the gas pedal earlier this month.

This morning, the stock's on afterburners thanks to a new buy rating from Argus Research, which says the shares -- currently priced at $37 and change -- should climb as much as 15% over the next 12 months. Last week, you see, Warren Buffett revealed to Bloomberg that his Berkshire Hathaway (NYSE: BRK-B  ) has taken a 5% stake in the refiner, and apparently that was enough of an endorsement to get Argus to take a look. You should, too.

Priced at the ultralow valuation of less than five times earnings, Phillips 66 justifies about half its market cap simply by paying out the 2.2% dividend yield it promises. As for the rest, long-term profits growth estimates of nearly 7% won't exactly set the world on fire, but they're more than enough to make this stock a bargain. Buffett's right to buy it, Argus to recommend it, and, heck, I think the stock's sufficiently attractive that I'll hop aboard this train and recommend it, too. On Motley Fool CAPS, I'm putting my reputation on the line, and assigning Phillips 66 an "outperform" rating. Want to see how it works out? (I'm kind of curious, too.)

Click this link and follow along.

All oil, all the time
Of course, not all's equal in the oil patch. At the same time as Argus was busy writing up its positive report on Phillips 66, Canadian stock shop RBC Capital Markets was downgrading oil driller Penn West Petroleum to neutral. Across the ocean, Brit banker Barclays went even further, cutting Penn West all the way to "underweight" (read: "sell").

Why all the pessimism about Penn West? Price probably has something to do with it. On the one hand, Penn West is an uber-generous dividend payer, writing checks worth 8.1% of its market cap to shareholders each and every year. On the other hand, the stock's 15 P/E ratio looks a bit steep relative to consensus estimates of 9% long-term growth. This year's projected $0.17 in profits result in an even scarier 74 current-year P/E, and even if profits rebound as expected next year, the resulting forward P/E of nearly 26 doesn't give much ground for optimism.

Long story short, the analysts may be right about this one. Stocks don't often lose 42% of their market cap in a year (as Penn West has) for no reason. Dividend or no dividend, this stock just might merit a "sell."

Veni, vidi, VIVUS!
Speaking of stocks that trade more on their prospects than on their past accomplishments, shares of VIVUS are soaring this morning on confirmation that the FDA has cleared its diet drug Qnexa (aka Qsymia) for sale.

Analysts are rushing to update their guidance on the news, with Jefferies lifting its hold rating on the stock, Brean Murray reiterating its buy rating, and Rodman & Renshaw -- most optimistic of all -- upping its price target on the stock by a full third, to $52 a share. For a stock that, even after today's run-up, fetches only $30 a stub, that's a pretty strong endorsement, amounting to a promise of 73% profit to new buyers. But is it reliable?

Your guess is as good as theirs. You see, with no profits to base a valuation on -- nor even revenues to work from -- it's terribly difficult to affix a value to VIVUS with any accuracy. Analysts think the company will earn enough next year to give the stock a 78 forward P/E ratio. But that's just a guess. Even with FDA approval, there's no guarantee the drug will catch on with consumers, or prove profitable for VIVUS if it does. Indeed, even if the stock is as successful as analysts hope, the stock's projected 30% annual growth rate probably isn't fast enough to justify the skyhigh P/E ratio VIVUS shares now carry.

Long story short, even after the good news, I'd rather be short this stock than long.

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

Fool contributor Rich Smith holds no position in any company mentioned, but The Motley Fool owns shares of Berkshire Hathaway, and Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. 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.


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