Monday'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, a rainy day on Wall Street is putting a damper on analyst activity, but we still have a few new recommendations for you: LifeLock (Nasdaq: LOCK  ) , a recent IPO that's getting positive press from Needham & Co., plus Anworth Financial (NYSE: ANH  ) and Yanzhou Coal Mining (NYSE: YZC  ) -- two companies getting knocked down by downgrades. Let's find out why.

Good news first
 It's looking rather dark and stormy out there, folks, so let's begin with some sunny news. This morning, before the storm shut things down, analysts at Needham & Co. were able to rush out an early morning buy recommendation on LifeLock -- the identity theft protector whose CEO famously dared the ID pirates to try and "steal my Social Security number."(And then they did just that).

LifeLock shares currently cost $7 even, which is 16% less than they began trading at on IPO day less than a month ago, and 30% below where the CEO had hoped to price the shares. Evidently, Needham thinks the sell-off is not justified, and it may have a point. Already profitable, LifeLock is an even better cash generator than its GAAP financials suggest, generating $33.7 million in positive free cash flow over the past 12 months, or more than twice its reported "net income" of $13.4 million.

Analysts expect normalized earnings at the company to increase upwards of 140% over the next couple years. At a today-valuation of just 18.5 times free cash flow, LifeLock just might be worth breaking into.

How much is Anworth worth?
 ...Not so for mortgage REIT Anworth Financial -- or not according to Maxim Group at least. Following a Thursday earnings report that showed Anworth earning 17% less in "core earnings" for Q3, than it earned last year, Maxim downgraded the mREIT from "buy" to "hold."

On the plus side, Anworth says it grew its book value nearly 4% over the past three months, and the company's latest dividend announcement gives the stock a tidy 10% forward dividend yield. At a P/E of just 8.4, it also sells for a sizable discount to more popular mREITs such as Annaly Capital (NYSE: NLY  ) , which carries a nosebleed valuation of 50 times earnings. Back on the minus side, though, Anworth's dividend is about 240 basis points less generous than its trailing yield, and 270 basis points lower than what Annaly pays today.

That said, if you're comfortable investing in highly leveraged mREIT business models generally, Anworth probably deserves a look. Assuming it can maintain its new, lower dividend level, the 10% payout at Anworth, plus future earnings gains projected to average 5% per year, suggest the company's 8x P/E ratio is actually pretty cheap.

What's Chinese for "too expensive?"
And finally, we come to Yanzhou Coal Mining -- finally, a stock I think we can all agree is way, way too expensive for anyone to want to own. Priced at 58 times earnings, but expected to grow these earnings at a lowly 5% annual rate over the next five years, the stock looks vastly overpriced on the surface. And that's before you even sink a shaft into the cash flow statement, where you'll discover that Yanzhou generated less than $113 million in free cash flow over the past year -- or about one-tenth of what the company claimed as its GAAP "earnings." 

Income investors may be willing to overlook these faults in hopes of mining Yanzhou's rich 5.7% dividend yield. Value investors, however, should heed the wise words of HSBC Securities, which downgraded Yanzhou this morning.

HSBC's advice? Sell.

If you're on the lookout for some currently intriguing energy plays, forget coal and instead check out The Motley Fool's 3 Stocks for $100 Oil. You can get free access to this special report by clicking here.

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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