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, Wall Street is talking up the prospects at Netflix (Nasdaq: NFLX  ) and Corning (NYSE: GLW  ) , but talking down Western Digital (NYSE: WDC  ) . Let's find out why.

A new look at Netflix
Shares of Netflix were marching higher this morning -- higher, and faster too, than the rest of the market. For this, you can thank the friendly analysts at Caris & Co., who just upgraded the stock to "average." It's not a big bump, but it does mean the removal of what was essentially a "sell" rating on Netflix, and with that pressure removed, the shares are free to rise.

Why might you buy? Well, there are a couple of reasons. First, Netflix shares have lost half their value over the past year -- that's a pretty good reason to give 'em a second look. Second, Caris says that Netflix is on the cusp of inking a new deal with Epix -- a deal that was roundly panned as too expensive when announced two years ago. (Albeit, as my fellow Fool Anders Bylund recently pointed out, Epix is a plus in some respects, giving Netflix early access to Lion Gate's (NYSE: LGF  ) Hunger Games for example, which is a plus for all parties involved). But can even Katniss Everdeen save this stock?

I'm not so sure. One film does not a business make, and the subscribers brought in by one film aren't going to change the fact that at more than 37 times earnings, and a growth rate less than half that, Netflix continues to look frightfully overpriced. Maybe Netflix can get a better price out of Epix this time around, and boost its profits as a result. But going into negotiations just as Epix has a hot title in its hands, one Netflix probably really wants, I fear Netflix may get the short end of the stick.

Corning logic looks cracked
If I'm dubious on Netflix's prospects, though, I'm downright glum about Wall Street's second big "buy" rating of the day: Corning.

This morning, analysts at Stifel Nicolaus resumed their coverage of Corning. Perhaps it's encouraged by reports that Apple (Nasdaq: AAPL  ) , a big buyer of Corning's Gorilla Glass, is developing an "unbreakable" iPhone. Perhaps Stifel thinks that the popularity of such a product would boost sales of Gorilla Glass to Apple. Either way, Stifel urged investors to purchase the stock, promising Corning will hit a $15 price target (i.e., 26% profits) within a year.

To me, that looks like a pipe dream.

Sure, at first glance, Corning shares look cheap enough. The problem is that earnings growth over the next five years is projected to average just 1.5% (hint: that's lower than the likely rate of inflation). And I don't see how the shares stand much chance of appreciating on essentially nil growth.

Add in the fact that Corning still doesn't generate nearly as much free cash flow as it claims to be "earning" as net income -- yes, years after I first called them out on this issue -- and the shares may not even be as cheap as they look.

Is this the decline and fall of Western Digital?
Ordinarily, I hate to end this column on a down note -- so I won't. Our third and final rating of the day concerns Standpoint Research's perverse decision to downgrade shares of Western Digital.

Arguing that after doubling off a 52-week low, and rising 29% since the analyst picked it back in June, there's enough profit in Western Digital stock now to "take some off the table," and Standpoint this morning did just that. Warning that in the event of a market reversal, Western Digital could be unduly punished, the analyst downgraded the shares to "hold."

And yet, it did so not without some reluctance. According to Standpoint, Western Digital is still an "undervalued" stock. It's just not as undervalued as it once was. But if you ask me, the stock's still plenty cheap to own.

Priced at less than seven times earnings, most analysts believe Western Digital can safely be expected to grow its earnings in the high double-digits for the next five years. Even better, the company is currently generating so much more free cash flow ($2.3 billion) than it reports as net income ($1.6 billion), that it's arguably even cheaper than it looks. Fact is, with these kinds of profit numbers, Western Digital would probably be a buy at half the growth rate it's projected to achieve. And at the 18% consensus growth number? It's screaming "buy" rather loudly.

Want to find out more about the stocks making the most noise on Wall Street? Pick up a copy of our brand new premium research reports on these companies. Each comes with a full year of analyst updates, so click the links below to claim your copy today.

Whose advice should you take -- mine, or that of "professional" analysts like Caris, Stifel, and Standpoint? 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 shares of, nor is he short, any stock named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 288 out of more than 180,000 members. The Fool has a disclosure policy

The Motley Fool owns shares of Corning, Netflix, Western Digital, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Netflix, and Corning. 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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  • Report this Comment On August 21, 2012, at 5:22 PM, powerbroker12 wrote:

    What is your source for the statement, "The problem is that earnings growth over the next five years is projected to average just 1.5%"?

  • Report this Comment On August 21, 2012, at 6:15 PM, ir4getful wrote:

    I went back and read your piece in '08 about LCD vs OLED and Cornings large investments in manufacturing obsolete technology. I don't understand what the issue was nor is. Corning manufactures substrates used in applying LCD, OLED, Plama, and other technologies. They simply provide the paper upon which to write. Specialized paper, to be certain, and they are the leaders in those technologies (substrates and the like). In fact Corning and Samsung (the largest producer of OLED devices) have formed a joint venture to work cooperatively in further research of substrate materials for application of OLED technology. Seems to me Corning is in the best of both worlds.

    For me, I see a company with exceptional research and patent properties in a field of almost limitless possibilities whose cash balances make up over a third of their stock price. And that is beside the fact that glass for TV sets, computers and handheld devices is not their only business. Fiber isn't going away soon and they have other areas of interest and expertise, as well.

    Granted, their stock performance has been a disappointment (no thanks to you) but I'll continue to add at these prices and remain patient. This won't be the first resurgance for this first-class company.

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