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's top headlines include analytical reprieves for Wal-Mart (NYSE: WMT  ) and First Horizon National (NYSE: FHN  ) , but a downgrade for True Religion (Nasdaq: TRLG  ) . Let's get the bad news out of the way first.

Losing faith in True Religion
Fashionista True Religion is taking a beating this morning as Caris & Co. reacts to lowered fiscal 2012 guidance (as bad as $1.80 a share) by downgrading the stock. Adding injury to insult, the analyst cut its target price on the stock to $32 (an 11% markdown). But was the news really as bad as all that?

Actually, no. While guidance is coming down, True Religion's Q2 results were actually quite a cut above what Wall Street had been expecting. Earnings of $0.39 per share came in $0.04 ahead of consensus, which is quite a feat, considering that TR actually sold fewer goods than expected.

What's more, it's not as if the stock is all that expensive -- at least, not now that it's dropped 15% in response to the news. Indeed, at barely 12 times earnings, True Religion sells for a discount to its 15% long-term projected growth rate, and with a dividend yield now approaching 3%, it could start looking good to income investors as well. The one thing that worries me about this company, though, is the fact that free cash flow, which was outpacing net income as recently as six months ago, has now swung to about 23% less than reported net income. Personally, while I'm not exactly thrilled with the new trend in FCF, I still think the stock is cheap.

And yes, I'm willing to put my reputation where my mouth is. Caris may have lost faith in True Religion, but I think the stock will outperform the market, and I'm saying so in my Motley Fool CAPS portfolio. Want to see how the pick works out? (To tell the truth, I'm kind of curious myself.) Follow along.

Gaining confidence in Walmart
On the flip side of retail, meanwhile, Wal-Mart-stock shoppers just got a flyer in the mail from Deutsche Bank. As reported on StreetInsider.com this morning, Deutsche's arguing that Wal-Mart deserves an upgrade to hold on the theory that "improving fundamentals" and a gravitation of investors toward "defensive" stocks will work to Wal-Mart's advantage.

Deutsche sees further prospects for Wal-Mart to underprice and outcompete rivals such as grocer SUPERVALU (NYSE: SVU  ) and electronics kingpin Best Buy (NYSE: BBY  ) , stealing market share in the process. This lends credence to Wall Street's belief that Wal-Mart will be able to grow earnings at an 8% clip over the next five years.

The bad news? 8% probably still isn't fast enough to justify Wal-Mart's 16 times earnings valuation.

Will First Horizon shine?
Last but not least, we come to banker First Horizon, recipient of a second upgrade -- this time from Compass Point. According to Compass, revenue growth at First Horizon is likely to "remain underwhelming" and there's also "putback" risk that buyers of residential mortgage-backed securities tied to FH-issued home loans may demand the bank repurchase the loans when they go bust. (So this is hardly a glowing endorsement.)

Still, Compass says that FH's share price is so low right now that you basically need to see everything that possibly can go wrong, actually go wrong for the stock to fall any further. Arguing that such a "worst case" scenario is unlikely, the analyst says it's time to quit shorting First Horizon, and shift into a neutral rating for the time being.

Neutral, as in, "not a buy." Here, I think the analyst is correct. First Horizon isn't currently profitable. The profit it's expected to earn next year is only enough to give the stock a 10 times forward P/E ratio, which is more expensive than what many bigger, more stable banks cost. Meanwhile, FH's meager 0.5% dividend yield really doesn't pay investors very much to wait around in hopes of better times. Long story short, while there's not too much to hate about First Horizon right now, there's not a lot to like, either.

This is not to say there are no bargains in banking to be found, however. Find out which banking stocks  the smartest investors are buying in our new report, free for download today.

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

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. 308 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Best Buy and SUPERVALU. Motley Fool newsletter services have recommended buying calls on SUPERVALU and creating a bull call spread position in Wal-Mart Stores.

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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