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.

This morning, analysts are talking up shares of NVIDIA (Nasdaq: NVDA  ) but talking down Roundy's (NYSE: RNDY  ) and Capstone Turbine (Nasdaq: CPST  ) . Are they being too positive? Too negative? Let's find out, beginning with…

It all seems so unfair. Yesterday, graphics semiconductor star NVIDIA beat earnings with a stick, crushing analyst expectations for both revenue and profit with equal aplomb. This morning, it received an upgrade from Nomura in response to the news -- yet the stock is down. What gives?

Worries over contracting profit margins are certainly part of the story. But Barron's notes that NVIDIA's graphics processors appear to be stealing market share from archrival Advanced Micro Devices (NYSE: AMD  ) , even if Qualcomm (Nasdaq: QCOM  ) remains a threat to its mobile ambitions. Meanwhile, management's partial revelation of cash flow information -- "Cash flow from operating activities was $200.9 million in the second quarter, up $210.1 million compared with $9.2 million cash used in the prior quarter" -- suggests the company is still bringing in the dough, whatever margins it uses to make it.

Back out the cash in NVIDIA's bank account, and the company today trades for about 12 times earnings. Value it on free cash flow, and it's probably even cheaper than that. (We'll have to wait for the 10-Q filing to know exactly how much cheaper.) In short, if NVIDIA manages to grow anywhere near the 16% long-term growth expectation Wall Street has set for it, the stock remains screamingly cheap -- and Nomura's right to recommend buying it.

This is why I personally own the stock, why I've publicly recommended it on Motley Fool CAPS, and why, incidentally, NVIDIA's also the subject of our new Fool report: "The Next Trillion Dollar Revolution." Download it for free today.

Taking a roundhouse
The situation with grocer Roundy's couldn't be more different. Yesterday, the company reported Q2 earnings of $0.42 per share -- not a bad number in and of itself, so why is the stock dropping more than 20% today?

First, a trio of Wall Street heavyweights have turned against the stock, with BB&T Capital Markets, Jefferies, and Credit Suisse downgrading to "hold." Then there are the reasons for the downgrades: Roundy's missed estimates for the quarter and made fewer sales than expected. Lastly, the owner of the Pick 'n Save and Rainbow Foods chains cut earnings guidance for the year -- and not just by the penny it "missed" by in Q2, either. Projecting worse performance from here on out, Roundy's warned investors that earnings for the year could drop as low as $1.10 per share, versus a forecast that had ranged as high as $1.42 previously.

On the bright side, this means that Roundy's could still end the year with a P/E ratio of about seven at today's prices. That will be an improvement over the P/E of 8 it carries today. On the other hand, there's still Roundy's significant debt load (about $650 million) to consider. Between the bad earnings news, the worse earnings projected, and the debt weighing on the company, Roundy's could be down for the count.

Ardour Capital takes Capstone down a peg
Last (and least), we come to alternative-energy small cap Capstone Turbine, a company I've panned on many occasions. Capstone reported earnings yesterday, and as usual, its fanboys are cheering a quarter of strong revenue growth -- and zero profit. The problem is that this quarter, the cheers are falling on deaf ears.

Why? This time it's not an issue of Capstone losing money or burning cash -- we're used to that. This time, it's sales that didn't measure up. Despite growing sales 19% year over year, Capstone fell about $2 million short of analyst expectations for $31 million growth. The miss was bad enough to scare backer Ardour Capital clean out of its buy recommendation and down to "accumulate" (which sort of still means buy, although many analysts will argue it really doesn't).

Should you be scared, too? As a matter of fact, while I still wouldn't touch the stock with the proverbial 10-foot pole, Capstone bulls do have a little something to hang their horns on this time around: Finally, Capstone has turned down the gas on its money-burning machine. While still negative, the company's $7.3 million in negative free cash flow for the first half compares favorably with the $12.7 million Capstone burned last year. This means Capstone's $45 million cash stash could last a bit longer and give the company a bit more time to figure out a way to profit from its business.

Here's to hoping.

If trusting your life savings to hope sounds like a poor investing strategy to you, consider instead buying a few shares of our new recommendation: "The Only Energy Stock You'll Ever Need."

Fool contributor Rich Smith owns shares of NVIDIA, but he holds no other 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.

The Motley Fool owns shares of QUALCOMM. Motley Fool newsletter services have recommended buying shares of NVIDIA. Motley Fool newsletter services have recommended writing puts on NVIDIA. 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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