Monday's Top Upgrades (and Downgrades)

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

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 an upgrade for Infinera (NASDAQ: INFN  ) , but downgrades for both Cabela's (NYSE: CAB  ) and LeapFrog (UNKNOWN: LF.DL  ) . Let's hop right in, beginning with why...

LeapFrog may not hop as high
The trading week's beginning on a less aggressive note for shareholders of tot-gaming conglomerate LeapFrog, downgraded this morning to "buy" from a previous recommendation of "strong buy" at Ascendiant Capital.

Essentially, what this means is that Ascendiant still likes the prospects of the company that made three of the four best-selling toys of 2012. Still, with earnings coming out as soon as Wednesday, the analyst sees no point in getting ahead of ourselves. While LeapFrog certainly looks buyable at a price-to-earnings ratio of just 11, and a projected long-term growth rate of 20%, those numbers could change in a jiffy when LeapFrog reports its latest earnings tally.

In short, Ascendiant is suggesting investors look both ways before trying to play Frogger on the Earnings Season Superhighway. Take a breather for now, examine the numbers when they come out, and then decide whether you really want to buy more of this stock.

To me, that sounds like sound advice. After all, while the P/E on this one looks good, LeapFrog is generating significantly less free cash flow than its GAAP earnings suggest -- only about $25 million across the past four reported quarters. That suggests the stock may not be quite as cheap as it looks, and argues strongly in favor of caution heading into earnings day.

 Cabela's versus the bears
Wall Street's even more worried about the prospects of sporting goods retailer Cabela's this morning, as Feltl & Co. downgrades the shares from buy to hold. And once again, the analyst is right to be cautious.

While it's true Cabela's generates greater free cash flow than does LeapFrog, and is growing nearly as fast (17% projected over the next five years), its P/E ratio -- 20 times earnings -- is still quite high. Also important: While LeapFrog is a company with $50 million cash and no debt, Cabela's is much more highly leveraged, sporting a balance sheet piled high with $2 billion more debt than cash.

Result: At an enterprise value-to-free cash flow ratio of 28, Cabela's shares already price in all of its strong growth prospects and more. The company's going to have to grow even faster than Wall Street thinks it will to justify a valuation this high.

Getting aggressive on Infinera
Last but not least, we come to Infinera, an unprofitable networking equipment maker for which expectations always seem to run high. Today is no exception, as analyst MKM Partners urges investors to rush right out and buy a few shares ahead of earnings -- which are due out as early as tomorrow.

MKM says this not because the company's expected to wow us on Tuesday, mind you. To the contrary, most analysts on Wall Street think Infinera will report a $0.06-per-share loss, equivalent to what it lost a year ago. If they're right, that'll bring total 2012 losses to $0.40 per share -- but here's the thing: In 2013 Infinera is expected to cut those losses by 75% (to $0.10 a share), en route to an eventual transformation into profitability. It's this prospect of improved performance going forward -- and maybe even some management guidance that would confirm Infinera is on track -- that has investors feeling optimistic about Infinera's chances tomorrow.

As for me, though... I'm still looking at numbers that show Infinera burning increasing amounts of cash ($100 million over the past four reported quarters alone), and feeling skeptical. Infinera remains a "show me" stock. Mere promises just won't cut it.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Infinera and LeapFrog Enterprises. The Motley Fool owns shares of Infinera and LeapFrog Enterprises.


Read/Post Comments (0) | Recommend This Article (1)

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: 2233912, ~/Articles/ArticleHandler.aspx, 9/27/2016 8:29:14 AM

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...

Today's Market

updated 11 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

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

9/26/2016 4:02 PM
CAB $52.25 Up +0.36 +0.69%
Cabela's CAPS Rating: ***
INFN $8.71 Down -0.14 -1.58%
Infinera CAPS Rating: *****
LF.DL $0.00 Down +0.00 +0.00%
LeapFrog Enterpris… CAPS Rating: ***