Tuesday's Top Upgrades (and Downgrades)

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

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 headliners include a pair of upgrades for consumer favorites Smithfield Foods (UNKNOWN: SFD.DL2  )  and Public Storage (NYSE: PSA  ) . On the flip side, Herbalife (NYSE: HLF  ) gets zapped by a fan. Want more details? Let's dive right in.

When pigs fly
We start off the day on a bright note, as Carolinian banker BB&T Capital Markets taps fellow Southerner Smithfield Foods for an upgrade to "buy." And believe it or not, this pigpacker really might fly.

Why? Well, just take a look at the numbers. While Smithfield certainly has its flaws -- chief among them a $1.8 billion net debt load -- the stock's price certainly looks nice enough at a P/E ratio of just 10.6, versus a long-term projected growth rate of 11%. What's more, Smithfield's income statement doesn't do its cash-production prowess real justice. While the company reported earnings of only $341 million over the past 12 months, in fact the company generated positive free cash flow nearly 20% better -- $403 million.

At a price-to-free cash flow ratio of roughly 8.4, Smithfield could go far.

Sock it away
If only we could say the same for the day's other big buy rating. This morning, investment banker Cantor Fitzgerald came out with a buy rating of its own -- for Public Storage. Here, though, the prospects for profit don't look quite as bright.

Priced at a heady 39 times earnings, Public Storage carries a market cap out of whack with its modest business model of building boxes for people to store stuff in. While it's true that Americans have a lot of stuff and need places to put it, it also seems that in a weakened economy, we're not buying quite as much stuff as we used to. Analysts peg Public Storage's long-term growth rate at a very modest 6% -- far too low to justify the stock's nosebleed P/E ratio. And even though the company -- like Smithfield -- does a good job in the cash-producing department, its $1 billion in trailing free cash flow is still too little to explain the stock's high price.

Cantor may argue that Public Storage's "high occupancy level [will] facilitate ever-stronger pricing power that should lead to above-average core NOI growth." But unless the company grows several times faster than anyone (other than Cantor) seems to think it can, the share price is simply too rich to justify the analyst's buy rating on this one.

A shorter Herbalife expectancy
So much, then, for the stocks that Wall Street likes to love. How about now we take a look at one that investors love to hate?: Herbalife.

This morning analysts at Argus did a real number on the dietary supplements maker, slicing $20 off their target price for the stock, and cutting Herbalife to $56. On one hand, this move seems surprising in light of Herbalife's recent earnings beat back in October. On the other hand, given the negative publicity we've seen surrounding Herbalife rival USANA lately, it's perhaps understandable that Argus is injecting a note of caution into the stock. But is it justified?

Consider: At less than 12 times earnings, Herbalife shares seems pretty deeply undervalued for a stock growing at 15% and paying its shareholders a 2.6% dividend. Although it's true that Herbalife carries a bit of debt, and that its free cash flow numbers aren't as strong as we'd perhaps like to see, the share price still appears to offer a sizable margin of safety.

That's probably why, when all's said and done, Argus still recommends buying the stock, albeit promising less upside potential than it once did. Based on the numbers, I think they're calling this one right.

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


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: 2138636, ~/Articles/ArticleHandler.aspx, 5/24/2016 3:59:03 PM

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...

Rich Smith

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.

Today's Market

updated Moments ago Sponsored by:
DOW 17,721.22 228.29 1.31%
S&P 500 2,076.95 28.91 1.41%
NASD 4,862.40 96.61 2.03%

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

5/24/2016 3:43 PM
HLF $62.19 Up +2.77 +4.66%
Herbalife CAPS Rating: *
PSA $254.25 Up +2.38 +0.94%
Public Storage CAPS Rating: ****
SFD.DL2 $0.00 Down +0.00 +0.00%
Smithfield Foods,… CAPS Rating: **