This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. In today's headlines, Wall Street's seeing miles of opportunity in the stock market sell-off, and upgrading many more stocks than it's downgrading. Topping the list: Regions Financial (NYSE:RF) and GameStop (NYSE:GME) have both been upped to "buy." On the flip side, though...
Dell goes down
Let's get the "bad" news out of the way first. We all know how the PC industry has been in a funk lately. That storyline came home to Dell (UNKNOWN:DELL.DL) investors -- and bit them -- this morning when analysts at Maxim Group cut their price target on Dell from $15 to $13. But was the cut deserved?
It hardly looks that way. Priced at a mere 5.25 times earnings, Dell's actually expected to keep growing its profits as time goes by. On average, the 30-odd analysts who follow the company predict earnings will grow at close to 5.7% per year over the next five years. Factor in a generous 3.3% dividend yield, and Dell's arguably quite the bargain at today's prices.
In fact, if you value the company on its free cash flow, that dividend alone pretty much pays for the firm's 4.2 enterprise value-to-free cash flow ratio. No wonder then that, though less optimistic than it once was, and lowering its expectations a bit, Maxim still recommends Dell as a "buy."
Regions Financial to outperform
In an even more ebullient note, banker RW Baird is recommending Regions Financial as an outperform this morning. Priced at $6 and change today, Baird believes Regions shares could hit $8 within a year -- more than a 25% gain. Is it right?
It's actually hard to say. Priced at 66 times earnings today, Regions doesn't really look like much of a bargain. It's growing, sure -- analysts predict earnings will rise 7% per year over the coming half-decade. But even if you apply that growth rate to forward earnings estimates (i.e., profits that Regions has not yet earned, and may never earn), rather than the firm's trailing earnings, Regions still ends up with a PEG ratio of more than 1.0. That makes for a pretty iffy valuation proposition.
In short, aggressive investors thinking of taking Baird's advice and buying Regions before its profits perk up next year may want to walk away from this one instead. Conservative investors, who focus on the profits Region's actually proven itself capable of earning, should run.
Don't stop believing in GameStop
Last on our list, video game retailer GameStop beat earnings estimates yesterday, reporting $0.38 per share (a nickel more than expected) despite booking less revenue than expected, and despite a massive 8.3% decline in same-store sales. Management also guided investors to expect an earnings beat for the year, giving a range of $2.07 to $2.27 per share that, at the midpoint, suggests a penny more profit than Wall Street was hoping for.
The earnings beat, and the prospect of an earnings re-beat for the year, won accolades on Wall Street as Caris & Co. announced an upgrade to "buy" for the retailer. And perhaps rightly so.
The situation with GameStop, you see, is a lot like that with Dell. Here again we have a company that no one expects to see much out of, and that is therefore capable of beating low expectations pretty easily. GameStop stock only costs about 10.6 times earnings after all. Yet the company's expected to grow these earnings at about 9.5% per year going forward, and GameStop pays its shareholders a very nice dividend yield of 4.3%. Again, a lot like Dell.
In short, the company's greatest growth days may be behind it -- but no matter. At a price this nice, you can still make a nice profit from GameStop.