This Just In: 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.

All tech, all the time
It's earnings season on Wall Street, and the analysts are feeling optimistic. This morning, three of Wall Street's best and brightest anointed three of Big Tech's finest with new buy ratings.

First up, Piper Jaffray and Goldman Sachs are fawning over Cisco Systems (Nasdaq: CSCO  ) . Piper now rates Cisco "overweight" and has added 10% to its previous price target on the stock, predicting this $17-and-change stock will hit $22 within a year for a tidy 24% profit. Meanwhile, Goldman Sachs has gone a step further. Already on record in support of the stock, Goldman named Cisco to its "conviction buy" list Thursday. According to StreetInsider.com, Goldman says Cisco has hit an "inflection point" in which enterprise networking and switching sales will be "stronger than expected" going forward. Goldman further believes that "North American capex" -- often code for network infrastructure build-out at Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) -- will be at "above-seasonal" levels in the second half of 2012.

That won't be good news for free cash flow at either of the telecom majors. But for Cisco, which sells telecom infrastructure equipment to them, it's welcome news indeed.

Granted, 13 times earnings still seems like a lot to pay for a stock with 8% projected growth. But if Goldman is right and Cisco is poised to grow faster than most people believe it will, the stock's valuation could start looking much more attractive -- and much sooner than expected.

Meanwhile, elsewhere in tech
Our other two buy ratings hitting the headlines today include a pair of computer memory makers: Seagate (NYSE: STX  ) and Western Digital (NYSE: WDC  ) . Lazard Capital initiated coverage on each of them this morning -- and in each case, Lazard said "buy."

The analyst put a $38 price target on Seagate, and an ambitious $50 price target on Western D. In each case, Lazard is projecting profit of roughly 17% for investors who buy at today's prices. And in each case, Lazard may actually turn out to be conservative.

Consider: At five times earnings for Seagate and 6.5 times earnings for Western Digital, neither of these stocks costs very much at all -- certainly not with most analysts on Wall Street projecting strong, double-digit annual earnings growth over the next five years. If there's a dictionary definition for "can't-miss investment," you have to believe these kinds of numbers fit the description.

Which to choose?
Of the two, I actually prefer Western Digital over Seagate, for the simple reason that over the past 12 months, Western D has outclassed its rival in the race to produce free cash flow. While Seagate's $2.6 billion in trailing FCF is certainly respectable, it's still about 8% short of reported GAAP earnings. In contrast, Western D is currently generating $2.35 billion in annual cash profits -- a number 45% ahead of reported net income.

Hard as it may be to believe, this means that Western Digital now sells for a price-to-free-cash-flow ratio that's even cheaper than its P/E -- just 4.6. Relative to long-term earnings growth expectations of 18%, that's a steal of a deal. It's also why Western Digital is by far my favorite of the three stocks named above (two of which I've recommended publicly on Motley Fool CAPS, by the way).

Of course, Western Digital isn't the only great value in tech. And Rich isn't our only analyst picking tech stocks. Read about another promising tech bargain in our new report: "The Only Stock You Need To Profit From the NEW Technology Revolution."

The Motley Fool owns shares of Western Digital and Cisco Systems, but Fool contributor Rich Smith holds no position in any company mentioned. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 280 out of more than 180,000 members. The 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. The Motley Fool has a disclosure policy.


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