Monday'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 an upgrade for Cisco Systems (NASDAQ: CSCO  )  and a new buy rating for Skyworks Solutions (NASDAQ: SWKS  ) . Meanwhile, on the "bad news" front...

A downgrade for True Religion 
Shareholders of jeans maker True Religion (NASDAQ: TRLG  ) may be disappointed to learn that their stock got downgraded by a trio of analysts today. Benchmark, B. Riley, and Standpoint Research all cut the stock to neutral -- but don't fret. The reason or the downgrades is actually good news... sort of... for investors: True Religion is getting bought out.

On Friday, private equity firm TowerBrook Capital Partners announced it intends to buy True Religion for $32 a share. So the analysts' multiple downgrades are really just evidence that they recognize that after spiking in response to the buyout, True Religion shares really don't have much room left to run.

Granted, I don't think TowerBrook is paying enough for True Religion. The buyout price still values the company at lower multiples to both sales and earnings than rivals like PVH and V.F. receive. Still, the analysts appear to be right about this one. Just $0.35 away from its likely buyout price, True Religion's run is done.

Cisco makes a save
Speaking of "done," one analyst says it's time to stop selling Cisco. This morning, FBR Capital removed its "underperform" rating from the Internet equipment maker and upgraded to "market perform." According to StreetInsider.com, which reported the upgrade today, FBR thinks upstart rivals Nicira, Big Switch, and Embrane, who had been eating into Cisco's business, are becoming "less disruptive."

"Pressure on traditional routing and switching could be pushed out a quarter or two" as a result, and indeed, the analyst thinks Cisco may be gaining some sales momentum -- even as capital spending levels have "started to moderate."

Result: Cisco at 12 times earnings and an 8% growth rate -- with a 3.2% dividend yield to boot -- just might be exactly as cheap as those numbers look. Fact is, FBR may be stopped too far short in its ratings change on Cisco. This stock isn't just too good to short. It might very well be good enough to buy.

Could Skyworks go to the moon? 
Last but not least, we come to Skyworks Solutions, the Apple iPhone supplier that's taken some licks as the shine came off investors' enthusiasm for Apple. Ace analyst Standpoint Research (yes -- this is the same gentleman who told you to buy True Religion before it got bought out, and who declared victory on that pick this morning) thinks the Skyworks selling has gotten overdone, and the stock actually looks attractive to buy now.

I agree.

Priced at 19 times earnings, but with a growth rate of "only" 16% and no dividend yield to make up the difference, Skyworks shares look slightly pricey on the surface. However, the company has nearly $460 million in cash that doesn't get counted in a basic "P/E" valuation, and Skyworks' $255 million in positive free cash flow is actually a bit more than what the company reports as "net income" under GAAP.

Result: I calculate an enterprise value-to-free cash flow ratio of almost precisely 16 for Skyworks, which aligns perfectly with the stock's predicted 16% earnings growth rate. While I'm not fully convinced that Standpoint is right about its price target for Skyworks -- $32 a share being a 33% gain from where the stock sits today -- I do believe the stock is at worst fairly priced, and at best, priced to move upwards.

Motley Fool contributor Rich Smith owns shares of Apple. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple.

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