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.

Today, analysts are talking up the prospects at Caterpillar (NYSE: CAT  ) , but talking down Ultra Petroleum (NYSE: UPL  ) and Toll Brothers (NYSE: TOL  ) . Let's listen in, beginning with...

The stock that makes analysts purr
As markets tumble yet again, one stock leading the indexes lower is Caterpillar -- down more than a full percentage point. That's surprising considering that the company just put an end to a labor strike at its Joliet, Ill., plant, extracting concessions on health care costs, pensions, and even wages from its unionized workers. It's even more surprising considering that the stock just got a new outperform rating from soon-to-be-Chinese stock analyst CLSA.

Details on the new rating are sketchy right now, but it's not too hard to guess what CLSA sees in Cat. The stock sells for a sub-10 P/E ratio, yet most analysts on Wall Street still believe the company will enjoy long-term profit growth in excess of 17% annually. That looks pretty darn cheap.

On the other hand, in Australia, world's biggest miner BHP Billiton (NYSE: BHP  ) just backed out of two expansion plans. That led to Australia's resources minister to declare the end of the global mining boom, which probably isn't good news for a mining equipment maker like Cat. Meanwhile, Cat itself may not be all it's cracked up to be. Its low P/E ratio, after all, is predicated on GAAP earnings of nearly $6 billion -- but actual free cash flow at the company recently tumbled to just $1 billion, which tells me this stock is a whole lot more expensive than meets the eye.

It's expensive enough, in fact, that I'm going to do something really Foolish today -- and take the other side of this trade. That's right. I'm going head to head with the analyst, and rating Caterpillar a "sell" when CLSA says "buy." Want to see how the pick works out? (I'm kind of curious myself.) Here's a link to my CAPS page. Feel free to rubberneck.

Ultra bad
Shares of Ultra Petroleum have been down 5% on the heels of a downgrade to underperform (that's analyst-speak for "sell") this morning. According to the analyst, the recent rebound in natural gas prices won't last, and the prospects for pricing in 2013 still look "muted."

Warning that gas producers won't see $5 (per million Btu) gas prices "in the foreseeable future," and implying that this is the price level companies like Ultra and Southwestern Energy (NYSE: SWN  ) need to reach if they're to turn a profit, Sterne Agee called Ultra shares "overpriced" today, and warned of imminent share dilution as the company struggles to remain solvent. Both stocks are down about 5% already in response to the comments, with Ultra taking falling a bit farther, seeing as it was the actual target of the downgrade.

And rightly so. Unprofitable today, and mired in $2.1 billion net debt, Ultra shares look fully as overpriced as Sterne says they are. (Not helping matters is the fact that Ultra hasn't generated a penny's worth of free cash flow in more than six years.) Barring an ultra-cold winter in 2012-2013, and one that drains nat-gas reserves to the dregs, Ultra Petroleum's prospects look ultra-bad.

Should you pay the Toll?
Finally, and with apologies for ending on a down note, we come to Toll Brothers, recent beneficiary of an even more recent uptick in homebuying. Management just finished wowing the Street with an earnings report that crushed the consensus numbers, but not everybody's impressed.

In fact, no sooner had Toll reported its earnings beat ($0.36 per share earned, versus the $0.18 expected), than out came MKM Partners with a downgrade to neutral... and MKM was being generous.

Listen, Fools. I'm not saying Toll didn't turn in a good quarter. It did. But with the stock now selling for 60 times earnings, even the strong double-digit growth that Wall Street expects it to produce over the next five years isn't enough to justify the stock price. If Toll continues to "make its numbers," the stock's still too expensive to buy. And if by some twist of fate Toll should happen to miss earnings a time or two, look out below.

Want more Foolish insight into Wall Street's headlining stock pick of the day? Get your premium stock research report on Caterpillar right here.

Whose advice should you take -- mine, or that of "professional" analysts like CLSA, Sterne Agee, and MKM? 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. 284 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum.

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 24, 2012, at 11:20 AM, NickP222 wrote:

    Recently, I've seen several positive recommendations at Motley Fool for UPL so I was surprised to read above, "Ultra shares look fully as overpriced as Sterne says they are." Recommend up or down but get all the relevant facts in one article.

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