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Tuesday's Top Upgrades (and Downgrades)

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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 upgrades for online treasure-hunt engine eBay (NASDAQ: EBAY  ) and underground gold miner Yamana Gold (NYSE: AUY  ) alike. But it's not all good news, so let's start off with a look at why one analyst thinks ...

Cracker Barrel is a crumb-y stock
Shares of old-timey Cracker Barrel Old Country Stores (NASDAQ: CBRL  ) have been on a tear, gaining more than 41% over the past 52 weeks. But over at analyst house Miller Tabak, people are thinking this restaurateur's run is done. Miller cut its rating on the stock from "buy" to "hold" this morning, assigning a 12-month price target of $81 to a stock that costs nearly that much already.

And they were right to do so.

Priced at nearly 17 times earnings after its run-up, Cracker Barrel shares now look overpriced relative to consensus expectations for 10% annual earnings growth over the next five years. Granted, the company boasts strong free cash flow from its business -- $115 million versus $112 million in reported earnings. Granted, too, Cracker Barrel pays a generous 2.5% annual dividend and might be worth holding onto for that yield alone. But as far as buying more shares goes, though, the stock just plain costs too much.

eBay shares -- now with free shipping!
Looking for a better bargain? Investment banker Cantor Fitzgerald thinks it's found one in the shares of online marketplace eBay. Up 34% over the past year, eBay shares are nonetheless down 13% from their February highs, as Cantor points out. With "strong" fundamentals, "modest" margins improvement, and moves to expand the market in point-of-sale and mobile payments at PayPal, Cantor sees eBay becoming a $56 stock and recommends buying it.

I disagree.

While eBay has a lot to recommend it -- strong free cash flow and a rock-solid balance sheet boasting $4.9 billion in cash net of debt, to name two items -- the stock looks pricey at 26 times earnings and only 15% growth. Cantor's promise of a 10% one-year profit on the stock simply doesn't look rich enough to entice investors to buy this one. Not with the shares so obviously overvalued already, and so vulnerable to a pullback.

Gold rush!
One thing I'll say in eBay's defense, though: It's not as horrible an investment idea as the one analyst Cowen & Co. floated this morning.

Recommending investors pick up their shovels and head over to load up on Yamana Gold shares, Cowen praised Yamana for being one of the few gold miners to have not cut 2013 guidance this year. The analyst sees Yamana shares are being worth $16.40 within a year and recommends buying them now.

But here's the thing: Priced at 26 times earnings, but growing at barely 9%, Yamana is fully as pricey as eBay yet is growing more slowly. Adding to the stock's riskiness is that Yamana recently broke a three-year streak of positive free cash flow production. In 2012, the company not only failed to generate sufficient free cash flow to back up its reported GAAP profit (a notable defect in the company, even back when it was generating cash). Yamana actually began burning through what cash it has, resulting in a "free" cash flow number of negative $380 million. 

I prefer to invest in companies that generate cash, rather than burn it. Unfortunately, Yamana is not that kind of stock.

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Related Tickers

5/27/2016 4:02 PM
AUY $4.17 Down -0.22 -5.01%
Yamana Gold, Inc.… CAPS Rating: ***
CBRL $152.77 Up +2.27 +1.51%
Cracker Barrel Old… CAPS Rating: ***
EBAY $24.36 Up +0.24 +1.00%
eBay CAPS Rating: ****