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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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So 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 for a WellPoint (NYSE: WLP ) under new management, talking down a relocating Eaton (NYSE: ETN ) , and sending tech stocks higher with a pair of new price targets for Ciena (Nasdaq: CIEN ) and Akamai (Nasdaq: AKAM ) . Let's find out why.
Fire in the (CEO) hole!
Up nearly 8% on the day, WellPoint shares were exploding higher this morning, but is it fireworks or a bomb burst? For one person in particular, CEO Angela Braly, it's the latter, as the beleaguered WellPoint boss "resigns" (i.e., gets fired) for her role in driving the stock price down by double digits over the past year while the rest of the stock market went up.
Wall Street, however, is hailing the interim promotion of Executive Vice President and General Counsel John Cannon to the CEO's chair as a second chance for WellPoint. At Bernstein, analysts think the news in and of itself justifies an upgrade to "outperform" -- and they're right.
Honestly though, given today's stock price, it probably doesn't matter a whole lot who wears the CEO hat at WellPoint -- the stock could be a "buy" if they put a monkey in the corner office. At 8.5 times earnings, a 10% long-term growth rate, and a 2% dividend yield, WellPoint was cheap any way you looked at it. All it took was a CEO switcheroo to give investors an excuse to take another look. Apparently, they like what they see here -- and so do I. That's why I've already publicly rated WellPoint an "outperform" in my publicly viewable CAPS portfolio. That's why the stock is crushing the market, even as we speak.
Moving up, and moving out
In other news, industrial heavyweight Eaton caught some major flak in the pages of The Wall Street Journal this morning, pilloried as one of several high-profile companies that have decided to reincorporate abroad in a big to dodge U.S. corporate-tax rates.
That's not the reason MKM Partners downgraded the stock this morning, of course. (It's more a case of karma.) What worries MKM isn't the bad PR Eaton has brought upon itself, but rather an eclectic mix of risks ranging from "China hydraulics" to "NAFTA trucks" to "an imperfect transition from industrial to commercial-led growth in Electrical Americas." Or, in other words: growth concerns.
Sure, with a P/E ratio of less than 11, Eaton doesn't need a whole lot of growth to support its stock price. But with most analysts projecting single-digit growth over the next five years, the stock's already on the cusp of overvaluation. When you consider further that the company generated only $994 million in positive free cash flow last year (versus reported "income" of $1.4 billion), it's evident that Eaton is more expensive than meets the eye -- and with a net debt load of $3.2 billion, you can argue it's even more expensive than that.
Long story short, MKM is right to be cautious about this one. Bad PR may be only the beginning of Eaton's problems.
A time for tech?
Last but not least, we come to our two tech newsmakers of the morning: Ciena and Akamai. Both can be loosely described as "Internet" stocks -- Ciena helps build telecom networks; Akamai makes them work more efficiently. Both just got their price targets raised by Wall Street, with Mizuho lifting Ciena to $20 a share on a buy rating, and Canaccord Genuity giving its stamp of approval (and $37 sticker price) to Akamai.
But is either stock really worth that much? Not necessarily. Take Ciena, for example. Unprofitable and laden with debt, Ciena doesn't look much like a $20 stock, and so far investors disagree with Mizuho that this one's worth buying. In the face of the analyst's price increase, and with an earnings report looming tomorrow, they're selling off Ciena shares to the tune of 3.5%.
They're probably right to be cautious. On one hand, yes, Ciena's generating better free cash flow than its "unprofitable" GAAP earnings suggest. Yet even optimistic forecasts for future profits leave Ciena costing more than 20-times forward earnings, while growth expectations are still just in the teens. In short, no matter how well Ciena winds up doing tomorrow, the upside here looks limited.
Similarly with Akamai. On one hand, at a P/E ratio of 36.5, the stock seems pricey for a low-teens growth rate. On the other hand, Akamai generates copious free cash flow -- $350 million over the past year. But on the third hand, it's overpriced despite all the cash. That $350 million still only drops Akamai down to a price-to-free cash flow ratio of 19 -- and that's simply not cheap enough for a 13% grower.
Long story short, there's still only one tech stock out there that you really need to pay attention to, and it's still the one we wrote about in our free report. Ciena and Akamai? They're just not it. To find out who it is, gain instant access.
Whose advice should you take -- Rich's, or that of "professional" analysts like Bernstein, Canaccord, and Mizuho? Check out Rich's track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.