Friday'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 a pair of earnings-inspired downgrades for first Advanced Micro Devices (NASDAQ: AMD  )  and Intuitive Surgical (NASDAQ: ISRG  ) .

On the plus side, though, one analyst is naming Under Armour (NYSE: UA  ) a winner. Let's start the week's final trading day off on a bright note and begin with that one:

Under Armour could sprint
As next week's earnings report approaches, analysts are getting in line to line up behind Under Armour. Canaccord Genuity led off earlier this week with a reiterated buy rating and a price target raised to $70, arguing that "new product introductions/extensions in both apparel and footwear... the relaunch of bags in accessories... the impact of accelerated shop-in-shop openings at [Dick's Sporting Goods (NYSE: DKS  ) and] sq. ft. growth... and improved planning" will all help to grow revenues, improve gross margins, and deliver more profit to the bottom line.

Initiating at outperform yesterday, banker Wedbush added that "women's, youth, footwear and international continuing to represent UA's most significant wholesale opportunities," while also looking forward to "continued growth of direct-to-consumer operations." And this morning, SunTrust Robinson Humphrey leapt aboard the Under Armour train, initiating coverage with a buy rating and a $71 price target.

Are they right? I don't know. Personally, I'm still leery of the more-than-53-times-earnings valuation at Under Armour. But it's undeniable that, at least in one respect, Under Armour is improving. Free cash flow at the company, which has historically vacillated between weak and negative, is now firmly in the green and even outpacing reported net income. While I don't think it's strong enough to support UA's lofty $6.4 billion valuation yet, the trend's clearly moving in the right direction. UA could surprise.

Retreating from Advanced Micro
Less happy news greets Advanced Micro Devices shareholders today. Yesterday, AMD beat estimates soundly, but only by losing less money ($0.09 per share) than expected ($0.13 per share). It seems that's not going to be good enough for Wall Street, however, as we watch both Credit Suisse and Morgan Stanley downgrade to various flavors of sell.

I can't say I blame them for that. Beat or no, it's undeniable that AMD is losing money these days. It may or may not turn profitable next year, but even if it does, consensus estimates have the stock trading for a forward P/E ratio of 65 times earnings, which is quite a lot for a company that's only expected to grow earnings at about 11.5% per year over the next five years.

Top all this off with the fact that AMD carries a $1 billion net-debt load and has racked up $818 million in negative free cash flows over the past year, and I just don't see a whole lot to like about this stock right now.

Intuitive Surgical in the ICU
Intuitive Surgical? My, that one has been a disappointment this month, hasn't it? First, the company issued an earnings warning a couple of weeks ago. Then it followed that up by missing analyst earnings estimates yesterday. One analyst has already thrown in the towel on this one, with JMP Securities downgrading to market underperform this morning.

And yet, all the negative news has had one positive result: It's made the shares look (almost) cheap enough to own. Intuitive now sports a P/E ratio of less than 21. That's not quite cheap enough to make the stock a bargain if it hits consensus estimates of 16% earnings growth over the next five years, of course. The stock's probably even less of a bargain if growth stalls out below that level -- as seems to be becoming more and more likely with each negative announcement. And, of course, free cash flow remains a mystery as Intuitive wasn't able to put together a cash flow statement in time for yesterday's earnings release.

All that being said, if you liked Intuitive Surgical a few months ago, when the shares were selling for north of $580 a share, you kind of have to like the stock today at its new and improved price of less than $370.

My advice: Let's keep a sharp eye out for that 10-Q filing. If the free cash flow number looks better than the earnings number, this low-hanging stock could be ripe for the picking.


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9/28/2016 4:00 PM
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