Tuesday's Top Upgrades and Downgrades

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we'll look at an upgrade (of sorts) for Public Storage (NYSE: PSA  ) , an arguable downgrade for Ariad Pharmaceuticals (Nasdaq: ARIA  ) , and for Baidu.com (Nasdaq: BIDU  ) , a lower price target to hit.

Store 'em and forget 'em
We begin the day with good news, as an upgrade from Cantor Fitzgerald is helping self-storage company Public Storage dodge most of the selling on Wall Street today.

Don't get too excited, though. For one thing, Cantor only upgraded the stock to neutral, not buy. For another, the analyst seems less excited about the company's valuation, and more simply cognizant of the fact that Public Storage shares have slid from July's peak of nearly $150, down below the analyst's own price target of $145. At $136.55 a share, Public Storage really only needs to bob back up to what Cantor used to think was a pessimistic price for the shares in order to be a hold.

Or so thinks the analyst. If you ask me, 43 times earnings is an awfully high price to pay for a slow-to-no-growth business like storage. Analysts seem to think Public Storage will be lucky to eke out 5% profit growth per year over the next five years. At this price, and that growth rate, the stock still looks like a sell.

Time to cash out?
The reverse was true at Ariad Pharma. After scoring a clean double in market cap this past year, the stock's taking a hit today on news that one analyst thinks its run is done. This morning, Oppenheimer pulled its outperform rating on the cancer researcher. While Oppy still thinks there's a little gas left in the tank, and upped its price target to $23, Ariad's already within spitting distance of that price today -- $22 and change. As 12-month price targets go, the extra dollar doesn't look all that attractive to the analyst. Hence the recommendation to just hold.

Actually, though, investors might want to think seriously about going a step further, and cashing out of Ariad entirely. While the company's prospects are undeniable, right now we're still looking at a stock totally lacking in profits, and bringing in just $25 million a year in revenue.

Valuation's always tricky with biotech shops, and FDA approval of Ariad's ponatinib drug is far from certain -- and the agency has already rejected Ariad's ridoforolumus drug, licensed to Merck (NYSE: MRK  ) . And let's not forget -- a 100% profit is worth two in the bush. If you've owned Ariad and profited from the run-up, your best bet today may be to take the money and run.

Buy, buy, Baidu?
Last but not least, we come to China's Google -- Baidu.com. Stifel Nicolaus has long been a fan of the stock, and still recommends that investors buy it. But the analyst is starting to have doubts about the valuation. Ahead of next week's earnings, Stifel has decided to cut its price target on Baidu to $140 a share, down from a previous guess at $165.

Of course, even $140 would work out to a 22% gain for Baidu shareholders. Not too shabby. And it might even be possible.

While Baidu isn't the most diligent of companies in keeping investors up to date on its free cash flow situation, historically, the company has done pretty well in this regard. Last year, free cash closely approximated reported net income under GAAP. The year before, it outpaced GAAP net income. This speaks to a high quality of earnings at the company.

With Baidu now selling for less than 30 times reported income -- but expected to grow this income at close to 39% per year over the next five years -- a bet on Baidu to hit $140 within a year isn't at all out of the realm of possibility. In fact, if the company can maintain its growth rate, I'd say it's actually more likely to run past Stifel's target than undershoot it.

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu.com and Google. Motley Fool newsletter services have recommended buying shares of Google and Baidu.com.



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