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 feature two new buy ratings for TriQuint Semiconductor (NASDAQ: TQNT  ) and Nuverra Environmental Solutions (NASDAQOTH: NESC  ) . But the news isn't all good, so before we get to those two, let's find out why one analyst thinks...

Enerplus is a minus
Shares of oil and gas exploration and production company Enerplus (NYSE: ERF  ) are taking a tumble this morning, leading the market down, and off 4.5% in their own right. For this, you can thank the somewhat less than friendly analysts at RBC Capital, who pulled their outperform rating from the stock this morning, and downgraded the shares to sector perform.

At first glance, you might think this move owed entirely to a typographical error. In the course of making their downgrade, RBC made the curious move of switching around some digits in their price target -- which formerly stood at $16.83 per share, and now reads "$16.38."

That's hardly the only problem with Enerplus' numbers, however. For while the shares cost only $15 and change today, suggesting that RBC thinks there's at least some upside to be had, the cold, hard truth is that Enerplus' lack of profits and dismal prospects for the future make the contrary more likely.

Unprofitable today, and priced at 19 times what analysts hope Enerplus might earn next year, the stock seems overpriced relative to consensus projections of more than 5% long-term negative growth. The stock pays a nice dividend -- 6.7% -- but with neither GAAP profits, nor positive free cash flow to support it, it's hard to see how Enerplus can continue making such rich payouts for long.

Enerplus reported losses of $125 million over the past year, and burned through nearly twice as much cash as it admitted to losing ($244 million). With a record like that, I think a downgrade to only sector perform is still giving the company too much credit.

A new name, and a new buy rating, for Nuverra
Sticking with the energy stocks theme, our first positive rating of the day is Nuverra Environmental Solutions -- the company formerly known as Heckmann. Needham & Co. announced that they were beginning coverage on the fracking wastewater company this morning, and Needham likes Nuverra quite a lot. Quoted on today, the analyst called Nuverra "increasingly well positioned as a comprehensive environmental services provider for the longer-term U.S. shale plays." Needham also likes the firm's ability to offer "cradle-to-grave" solutions, and its customer base that is "becoming increasingly sophisticated in responsible waste handling needs."

That's all kinds of touchy-feely. So how do Nuverra's numbers look? Well, let's see here...

According to S&P Capital IQ, Nuverra has a market cap of just over $955 million, but no profits to speak of. It pays no dividend, and carries about $550 million more debt than it has cash on hand. "Nuverra," "Heckmann" -- call it what you like, none of that sounds particularly propitious. One bright spot on the company's horizon is that Nuverra is generating positive free cash flow. But at just $12.3 million generated over the past year, that still works out to a price to free cash flow ratio of 81 -- and an enterprise value to free cash flow well into the triple digits.

Long story short, Needham may like this stock's prospects -- but I do not.

"Tri" before you buy?
Finally, we'll end today's column on a positive note for a company I've followed, and admired, for quite a while -- but whose stock I've consistently panned: TriQuint Semiconductor. TriQuint received an upgrade to buy from the analysts at Charter Equity today, and the stock's reacting quite positively, dodging the market downdraft, and actually moving up more than 2% in response to the upgrade.

But does it deserve to?

Sadly, I fear it does not. Unprofitable today, paying no dividend, and yet priced at more than 22 times its anticipated forward earnings, TriQuint costs an awful lot for a stock that few analysts expect to grow earnings at much more than 13% per year going forward. Add to that the fact that the company is still not generating positive free cash flow (it actually burned about $18 million over the past year), and I just don't see a whole lot of reason to own this stock.

My advice: If Charter says it's a buy... let them try buying it.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Nuverra Environmental Solutions and TriQuint Semiconductor and has the following options: Long Jan 2014 $4 Calls on Nuverra Environmental Solutions and Short Jan 2014 $3 Puts on Nuverra Environmental Solutions .


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Rich Smith

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.

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Related Tickers

5/25/2016 1:14 PM
ERF $5.25 Up +0.29 +5.80%
Enerplus Resources… CAPS Rating: ****
NESC $0.26 Up +0.01 +4.84%
Nuverra Environmen… CAPS Rating: ***
TQNT $0.00 Down +0.00 +0.00%
TriQuint Semicondu… CAPS Rating: ***