Monday's Top Upgrades (and Downgrades)

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 Fifth Third Bancorp (Nasdaq: FITB  ) and Hess (NYSE: HES  ) , and alongside a curious "upgrade" for Netflix's (Nasdaq: NFLX  ) valuation. Let's dive right in.

Make a deposit at Fifth Third?
First up is Fifth Third, which began the day with an upgrade to "buy" from the analysts at Compass Point. As StreetInsider.com tells the tale, Fifth Third got the thumbs-up in anticipation of a Federal Reserve announcement that could permit the bank to increase its dividend and repurchase more shares.

While most bankers out in the world today are trading primarily in a risk-on / risk-off fashion, rising or falling based on the prospects of European economic doomsday, Midwest-based Fifth Third is largely insulated from the larger goings-on globally. Compass Point believes the stock will, however, react positively to news that it will begin paying a larger dividend and buying back shares.

It doesn't hurt, of course, that this is one cheap bank. Priced at less than nine times trailing earnings, growing these earnings at close to 5%, and paying a 2.6% dividend yield already, Fifth Third is anything but expensive. And if Compass Point is right, the combination of dividend increases and share buybacks could result in a tripling of the bank's "combined payout ratio" to 60% -- effectively about a 7.5% divvy.

Fifth Third: Get it while it's cheap.

And speaking of cheap ...
Ace stock analyst Standpoint Research sees another bargain in the shares of Hess. With the stock down 40% off its Q2 2011 high, Standpoint says Hess is selling for under "9X trailing twelve months earnings of $5.55 and less than 7X consensus estimates for next year of $6.55."

Now, even Standpoint isn't convinced Hess will hit that consensus number. After all, the company "has missed estimates in each of the last four quarters," so its track record is anything but great. And at the risk of nitpicking, Hess hasn't really earned $5.55 over the "past 12 months," either. It's earned $3.88. Probably what Standpoint means to say is that Hess is expected to earn $5.55 by the end of this year.

But give the analyst this much credit: If Hess does achieve the earnings it's expected to, then the resulting current year P/E ratio will indeed fall to about 8 -- and that's not a lot relative to the 8% long-term growth Wall Street expects to see from Hess.

While the stock's not a bargain yet, it is moving in the right direction.

Whither Netflix?
Speaking of directions, we're getting mixed ones out of an analyst at Caris & Co. today, as it switches up its opinion of Netflix. On one hand, Caris has just upped its price target on the video streamer-cum-DVD mailer -- to $59. On the other hand, Caris still hates the stock and rates it "below average" (analyst-speak for "sell").

Confused yet?

Don't be. This one's actually really easy to analyze. At 27 times earnings, and with no dividend to complicate matters, Netflix needs to grow earnings somewhere upwards of 20% per year over the next five years to be fairly priced. (And that's the best case.) Instead, most analysts agree that the most Netflix can reasonably hope to achieve is 16% long-term earnings growth.

Result: Netflix is on-its-face overpriced. Caris is right to continue insisting that the stock should be sold. Its small concession on target price today is little more than an upgrade from "grossly overvalued" to "vastly overpriced."

Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Fifth Third Bancorp and Netflix. Motley Fool newsletter services have recommended buying shares of Netflix. The Fool has a disclosure policy.


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