Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Wednesday'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, our top trio of newsmakers includes newly buy-rated Facebook (Nasdaq: FB  ) , and now-downgraded Norfolk Southern (NYSE: NSC  ) . Meanwhile, Apple (Nasdaq: AAPL  ) gets a new price target... all of $3 higher than its old one.

Facebook gets a facelift
Let's start with the big news of the day: Facebook lives! Yesterday, the social networking site confirmed a big increase in mobile advertising revenue, allaying concerns it would fumble the transition from desktop to mobile. Shares spiked as much as 24% higher in after-hours trading, and while they've slipped back a bit since, one analyst still sees a bright future ahead for Facebook.

This morning, Citigroup, Bank of America, and Stifel Nicolaus upgraded Facebook shares to buy. Stifel estimates the shares' value at $26, or about 10% higher than they currently trade. But honestly, euphoria over the good news aside, Facebook's valuation continues to trouble.

Priced at 173 times trailing earnings, and an even higher multiple to free cash flow, Facebook still looks woefully overvalued -- even if it manages to hit analysts' projected 36% annual growth rate. Sure, you could buy it, like the bankers' are urging -- but I wouldn't recommend it.

Norfolk Southern derailed
In contrast, for P/E investors at least, shares of railroad operator Norfolk Southern are starting to look downright attractive. Based on the company's most recent numbers, the valuation now sits below 11 times earnings -- not bad for a stock projected to grow at nearly 14% per year over the next half decade. Plus, Norfolk pays its shareholders a tasty 3% dividend yield.

Regardless, this morning has already seen at least three analysts -- Avondale Securities, Citi, and BB&T -- downgrade the stock to various flavors of "hold." Why? One big culprit could be cash flow. While fabulously undervalued from a GAAP earnings perspective, the fact remains that Norfolk Southern still doesn't generate anywhere near as much free cash flow (about $690 million) as it claims for GAAP earnings ($1.8 billion).

Result: At 28 times annual free cash flow, it's easy to argue Norfolk Southern isn't as cheap as it looks. Reason enough to hold, for sure, and reason enough to sell... perhaps.

Still the Apple of their eye
And finally, responding to yesterday's "other" big news item, many investors were disappointed that Apple didn't price their new iPad Mini under the psychological $300 barrier. Regardless, at least one analyst thinks this isn't the end of the world. This morning, Canaccord Genuity came out with a statement reassuring investors that "Apple's pricing of the iPad Mini will enable Apple to maintain dominant share of the growing tablet market by providing better hardware and a much more integrated and robust user experience at competitive pricing versus lower priced competing tablets." Meanwhile, iPhone sales are said to remain "strong" globally, and the analyst expects to see Apple "gain share within all segments of the PC market as well."

All of which added up to (in Canaccord's estimation) a grand total of... drumroll please... a $3 boost in price target! Canaccord, which previously put Apple's value at $797 a share, now gives it a nice, round $800 target.

The shift in share price target may underwhelm, but Canaccord's still right about one thing: With a P/E ratio of just 14.5, and so much free cash flowing into its coffers as to put even its mighty GAAP earnings to shame, Apple remains a buy -- for value investors, for growth investors, and with its new 1.7% dividend yield, for income investors as well.

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple and Facebook. 

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2073431, ~/Articles/ArticleHandler.aspx, 5/31/2016 8:30:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 3 days ago Sponsored by:
DOW 17,873.22 44.93 0.25%
S&P 500 2,099.06 8.96 0.43%
NASD 4,933.51 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/27/2016 4:00 PM
AAPL $100.35 Down -0.06 -0.06%
Apple CAPS Rating: ****
FB $119.38 Down -0.09 -0.08%
Facebook CAPS Rating: ***
NSC $84.00 Up +0.17 +0.20%
Norfolk Southern C… CAPS Rating: *****