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, our trio of featured stock picks includes new upgrades for Dendreon (Nasdaq: DNDN  ) and Arch Coal (NYSE: ACI  ) . Electronic Arts (NYSE: EA  ) , on the other hand, just got downgraded. But is it really...

...game over for Electronic Arts?
There are still more than 24 hours to go before EA reports fiscal first-quarter 2013 earnings, but analysts at Longbow aren't waiting to hear the facts before casting judgment on the stock. Instead, they're taking a cue from Zynga's lousy earnings report and downgrading EA ahead of the news.

Why? Bloomberg hit the nail on the head last week when it aired worries that EA's move into "social gaming" could backfire, given how badly lead social gamer Zynga is doing. Bloomberg urged investors to consider investing in Activision (Nasdaq: ATVI  ) instead, arguing that it has considerably less exposure to the social-gaming phenomenon -- and might even benefit if the fad is coming to an end.

That's a valid argument, but it's not the best reason to avoid EA. The simple fact of the matter is that while it's improving as a business, it still costs too much relative to the competition. Its 49-times-earnings valuation is nearly four times the P/E ratio at Activision, while its annual free cash flow is still a mere fraction of the amount of cash Activision brings in in an average year. EA may be in second place in the global gaming race, but so far it's still a distant No. 2.

Davids and Goliaths
And speaking of underdog rivals, you won't find a bigger David vs. Goliath story out there than the contest between Dendreon and Johnson & Johnson (NYSE: JNJ  ) to find a better way of treating cancer. Dendreon's proposed solution, a drug called Provenge, costs $93,000 for a course of treatment. Meanwhile, JJ is going the low-cost route with a new prostate cancer drug called Zytiga that, if approved, could cost as little as $5,000.

So far the contest looks stacked against Dendreon, but don't count it out just yet. Management at the biotech says it only needs to make $500 million in annual sales to begin earning profits, and it's more than 80% to that goal already. Dendreon reports earnings this evening, and if it turns out to be moving faster than expected -- or even promises to do so in the coming quarter -- the stock could soar. Fearing this, analyst Maxim Group decided discretion was the better part of value this morning and temporarily suspended its "sell" rating on the stock.

Will the analyst takes the next logical step and upgrade to "buy?" The answer hinges on the details of tonight's report. Stay tuned.

Arch has both downs and ups
Finally, we come to Arch Coal, recipient of a pair of upgrades from bankers at Sterne Agee and Global Hunter this morning. The catalyst for this, of course, was Friday's report of estimate-beating revenue, and a dime-per-share loss that was $0.08 better than feared (on an "adjusted earnings" basis).

But is this news good enough to justify the 24% leap in share price Arch enjoyed Friday? Does it make Arch worth the $15 a share Sterne Agee says it will hit within a year?

Unfortunately, no. There's one energy stock you need to own (you can read about it in our latest report on the energy sector), but Arch Coal is not it. Arch remains a deeply troubled company -- unprofitable, laden with a crushing burden of $4 billion in net debt, and burning cash faster than ever. I've said it before, and I'll say it again: "Unless something radical changes in the economics of coal -- and soon -- we could easily see Arch follow rival Patriot Coal down the bankruptcy rabbit hole" -- upgrades notwithstanding.

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

Fool contributor Rich Smith owns shares of Activision Blizzard. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 309 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Dendreon, Johnson & Johnson, and Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. 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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