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 headlines are biased to the downside, as analysts issue downgrades on Hewlett-Packard (NYSE: HPQ  ) and Trina Solar (NYSE: TSL  ) . On the plus side, though...

Somebody finally loves Inergy
Good news for Inergy (NYSE: NRGY  ) shareholders. Now that the company's got itself free of the propane business, and is focused solely on natural gas storage and supply, profits are flowing once again. Gross profit for the firm's natural gas liquids marketing, supply, and logistics business increased 31% in fiscal 2012, while storage and pipeline transportation profits were up 19%.

These numbers, reported Tuesday, were enough to win the stock an upgrade to "outperform" from banker RW Baird this morning, and a $21 price target. But is the stock really worth that much?

At $18 and change today, Inergy shares sell for about 37 times what the businesses it has left are expected to earn next year. Worse, earnings aren't expected to increase much at all in 2014, and analysts appear to be forecasting a GAAP loss for Inergy come 2015. Even with the stock paying a 6.1% dividend yield, these don't appear to be the kind of numbers that would justify a buy rating. My guess: Come 2015, investors who followed Baird's advice and bought Inergy today will rue the day they believed the banker.

Investors are in HP hell
Speaking of regrets, Hewlett-Packard has a lot of them -- mostly stemming from its decision to spend $10 billion to purchase Britain's Autonomy last year, a decision that prompted a $8.8 billion write-off this week. That news convinced one analyst to throw in the towel on HP today, as analysts at RBC Capital Markets reluctantly lowered their target price on the shares to $14, and cut HP's rating to "market perform."

Coming on the heels of HP's $8 billion writedown on its EDS acquisition earlier this year, you can understand why HP's latest admission caused RBC to finally lose patience with the tech giant. But is this former HP bull making a mistake by pulling in its horns after the bad news has come out? With the stock selling for less than half its high of the past year, might not now be the time to buy HP?

It depends. On the one hand, the stock's 3.2 forward P/E ratio holds undeniable attraction. HP's 4% dividend yield alone seems sufficient to justify that purchase price. On the other hand, though, HP's $20 billion net debt load means this stock is arguably much more expensive than it looks. The growth rate on HP is currently estimated at precisely 0% -- a big, round goose egg. And if writedowns keep coming at the pace they've been arriving lately, it's entirely possible the stock could actually report losing money in 2013, rather than earning the $3.46 a share it's projected to.

Long story short, while HP's massive free cash flows ($6.9 billion annually, at last report) continue to fascinate me, I wouldn't fault anyone for deciding this company is just too gaffe prone to risk investing in.

Last one out, turn off the lights
Speaking of gaffes, Chinese solar power concern Trina Solar announced a $0.81 per share loss yesterday, a number even worse than the $0.61 loss Wall Street was expecting. Solar module shipments were down 9% sequentially in Q3, and management doesn't seem to be expecting much improvement, if any, in the current fourth quarter.

That bit of cold water dashing of expectations appears to have been the final straw for Avian Securities, which this morning pulled its "positive" rating on the stock, and downgraded to "neutral." But the real question here is why Avian didn't just go ahead and say what it really means: "Sell."

Honestly, with the company unable to earn a profit, it's hard to see why anyone would buy Trina, even at its apparently low $2.21 share price today. The company's mired in debt -- about $640 million net of cash -- and burning cash like mad. True, at last report, Trina had enough cash on hand to fund its cash-incinerating ways for a couple more years, debt collectors permitting. But unless the company can figure out a way to generate some cash from its business, it's hard to see how this story can end well for Trina investors.

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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