Tuesday'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 hikes in price target for both 3-D printer company Stratasys (NASDAQ: SSYS  ) and soda jerk SodaStream (NASDAQ: SODA  ) . But the news isn't all good, so before we get to those two, let's take a quick look at why...

Cree investors are crying
The day has started out bleak for shareholders of LED lighting specialist Cree (NASDAQ: CREE  ) . Investment banker Sterne Agee removed its buy rating from the stock this morning, warning that although it's been successful so far, Cree will be running into "headwinds" soon, as competition from rival Philips (NYSE: PHG  ) and its lighting unit ramps up over the next two quarters.

Polling distribution agents who sell LED lighting products to end users, Sterne recently discovered that these agents prefer Philips' offerings over Cree's. And with these agents often serving as the gatekeepers to customers, that bias in favor of Philips could dampen demand for Cree's products -- and crimp its revenue growth.

That's a big problem for Cree (assuming Sterne Agee is right), because with its P/E ratio of more than 100, it's clear investors are hoping to see a lot of growth out of this company -- and they may not be willing to wait around another six months for evidence of it. Right now, even the 16.5% earnings growth that's expected out of Cree is looking a bit stretched to support the stock's triple-digit P/E. Should Sterne prove right, however, and this growth get curtailed by competition from Philips, then Cree could become a very dangerous stock to own.

SodaStream: Now with more fizz!
Speaking of growth stories: SodaStream. Last week, the Israeli home-brew-your-soda company beat earnings estimates by a well-carbonated $0.14, turning in first-quarter earnings of $0.68. Revenue also topped estimates, and with everything going great guns at the company, analysts are starting to tweak their numbers higher.

StreetInsider.com tells us that Deutsche Bank is doubling down on its buy rating and $56 price target on the stock, praising SodaStream's "strong top-line trends" and "improving U.S. household penetration." Oppenheimer and Monness, Crespi & Hardt are even more optimistic, announcing today that they've raised their price targets on the stock -- to $68 and $80, respectively.

And yet, as gratifying as "earnings beats" are to see, I just can't get behind this stock. Sure, 28 times earnings doesn't sound like a lot to pay for 25% growth, with the occasional bonus prize of faster-than-expected growth. But whatever the company's reported "net income" may be, real free cash flow continues to elude SodaStream. If the company generated a modicum of cash profit last year, well, it slipped right back down into FCF-negativity with this last quarterly report, and is now once again spending more on capex than it brings in the door as cash from operations.

Result: Earnings beats alone only go so far. What investors really need to see out of SodaStream is some real cash money being produced, and so far, SodaStream simply doesn't have any to show us.

Printing profits
Yet another big-growth story these days is the idea of three-dimensional printing -- micro-factories the size of a really big computer printer, capable of "printing" real, physical objects out of plastic composite. One of the pioneers of the industry, Stratasys, reported an earnings beat of its own yesterday, earning $0.43 in the first quarter, or a nickel more than expected. Revenues also topped targets slightly, and as a result, both Needham & Co. and Canaccord Genuity are raising their price targets on the stock -- to $94 and $95 a share, respectively.

Needham called the first quarter report "a solid start" to the year, and underlined the 18% year-over-year growth in "consumables" sales -- the plastic composite used by Stratasys' printers to build objects -- as particularly encouraging. Canaccord sees the company's forward guidance as "conservative," and thinks gross margins could improve, dropping more and more net profit to the bottom line.

But here's the thing: With Stratasys already expected to grow earnings at 30% per year over the next five years, big expectations are already well and truly baked into the stock's price -- which is now well north of 200 times earnings. Meanwhile, cash flow turned negative in the first quarter, and when dinged for its capital expenditures, the stock is now pretty deeply unprofitable from a free cash flow perspective as well.

In short, much as investors seem to love this stock's story, I'm afraid investors at today's prices will not enjoy a happy ending.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends SodaStream and Stratasys. The Motley Fool owns shares of SodaStream and Stratasys.

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