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 include new upgrades for DISH Network (NASDAQ: DISH  ) and KeyCorp (NYSE: KEY  ) , but a downgrade for Western Union (NYSE: WU  ) .

Bad news first
 We might as well get the bad news out of the way, right away. This morning, analysts at Goldman Sachs downgraded Western Union to a sell. Citing "pricing and competitive pressure," Goldman says it's been forced to lower its expectations for profit margin "significantly."

And yet, Goldman's characterization of them aside, the actual numbers the analyst is positing don't really look all that scary. According to StreetInsider.com, the margin compression Goldman cites only amounts to about a penny's reduction in fiscal 2012 earnings guidance for Western Union (to $1.61 a share). Fiscal 2013 expectations are down $0.06 at $1.40, and fiscal 2014's number is off $0.11 at $1.50. So worst-case scenario, this "significant" squeeze is only going to reduce Western Union's profits by about 7%.

Is that enough to justify selling the stock? I don't think so, and here's why: Priced at just 6.6 times earnings today, Western Union pays a beefy 3.7% dividend yield that in and of itself justifies more than half the stock's valuation. And Goldman's worries aside, most other analysts agree the company will keep on growing profits at a respectable pace over the next five years -- about 8% per year. Put it all together, and the stock still looks cheap to me, and it looks like anything but a "sell."

If only we could say the same about some of Wall Street's other picks today.

DISH goes cold
 Take DISH Networks, for example. The company just made a bid to steal Clearwire (UNKNOWN: CLWR.DL  ) from Sprint Nextel (NYSE: S  ) for a $3.30 purchase price, which is even more than Sprint was willing to pay. That alone suggests investors should be cautious on the stock. Instead, we learned today that Wunderlich is upping its recommendation to "buy," and assigning DISH a $42 price target.

This seems the height of madness.

Ignore for a moment the fact that DISH seems intent on overpaying for Clearwire. Even if DISH ultimately comes to its senses and keeps its wallet in its pocket, DISH shares still cost an incredible 22 times earnings, despite being pegged for barely 2% annual profits growth over the next five years. That's way too much to pay for DISH if the company gets bogged down in a bidding war over Clearwire... and it's still too much to pay, even if it doesn't.

Key doesn't fit
 And speaking of overpriced stocks, Oppenheimer upgraded KeyCorp to "outperform" this morning.

On the one hand, this makes some sense, recommending a bank in an economic environment where the federal government is practically giving money away, and practically guaranteeing that any banker in the business should be able to make a profit by charging interest to lend out that free money. Still, there have to be better bargains out there than KeyCorp.

Priced north of 10 times earnings, KeyCorp is expected by most analysts to grow at just 5.5% per year over the next five years. Even with a modest 2.2% dividend yield, that's a pretty paltry pace of growth with which to try and justify a double-digit P/E ratio.

I've said it before, and I'll say it again: If you're looking for a bargain in banking stocks, you're better off focusing on the faster growers and more attractive value propositions, that can be found among the bigger banks. Leave tiny KeyCorp to Oppenheimer. For yourself, take a closer look at megabanks like JPMorgan Chase (NYSE: JPM  ) and Goldman Sachs (NYSE: GS  ) . I think you'll like what you find there. 

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs and Western Union. The Motley Fool owns shares of JPMorgan Chase and KeyCorp. 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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