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 feature new buy ratings for Cloud Peak (NYSE: CLD  ) and Canadian Solar (NASDAQ: CSIQ  ) , but a downgrade for Jamba Juice (NASDAQ: JMBA  ) . Let's dive right in.

Is coal cool again?
In a rare bit of good news for coal investors, shares of Cloud Peak Energy are rallying today on news that investment banker Stifel Nicolaus has upgraded the coal miner from "hold" to "buy." Citing valuation as a primary factor in the upgrade, Stifel is assigning an $18 price target to the stock. But is it worth that much?

It's hard to say. On the one hand, Cloud Peak is a cash-generating business that churned out more than $120 million in positive free cash flow over the past 12 months. On the other hand, that's less than the $133.5 million in "net income" the company reported earnings under GAAP. It means that this company, which sells for a "P/E" ratio of less than seven, is probably more expensive than it looks -- and perhaps quite a bit more expensive than it looks.

On average, analysts expect that Cloud Peak's earnings will decline at a rate in excess of 26% annually over the next five years. Within just one year, this could push the company's P/E ratio up past 17 -- twice the level of its current trailing P/E.

In short, while Stifel believes that a recovery is in the offing at the company's Powder River Basin mines, the current trend looks less than propitious. Investors are probably best advised to wait until Cloud Peak begins producing better numbers before taking Stifel's advice, and jumping into Cloud Peak.

Bright skies for Canadian Solar?
Continuing the day's energy-focused theme on Wall Street, we saw a new "outperform" rating assigned to solar power company Canadian Solar at Northland Capital. Canadian Solar recently announced establishment of a Residential Financing Program that will help residential homeowners borrow up to $40,000 from Admirals Bank to install rooftop solar systems on their homes. Presumably, this development will help to boost the revenue growth rate at Canadian Solar. But will it boost it enough to allow the company to "outperform" the market?

I have to say that I have my doubts. Most analysts believe Canadian Solar will turn profitable this year, and throw off increasing levels of profit in years to come. A perennial cash burner, however, it remains to be seen how much these profits might be worth on a cash basis -- if anything. Meanwhile, the company remains unprofitable on a trailing 12-month basis, and continues to carry a debt load of nearly $1 billion net of cash.

Canadian Solar shares have already increased in value by more than 600% over the past year. It looks to me like the easy money has already been made on this one. For Canadian Solar to rise beyond its current near-$18-a-share valuation to reach the $26-per-share valuation that Northland posits, the company simply needs to do a better job of generating cash from its business. Until that happens, I can't agree that the stock looks like much of a buy at all.

Jamba gets juiced
Switching gears entirely on our final rating, we turn to juice purveyor Jamba, the subject of a pair of downgrades to "neutral" this morning. Jamba Juice shares got crushed last night after the company warned that its same-store sales will grow no more than 1% in 2013 -- a mere fraction of its previous growth forecast of up to 6% SSS growth.

This news has Wall Street feeling pessimistic. Both Northland, discussed above, and also Dougherty & Co., are downgrading the shares on worries about "significant shortfalls in current operating performance of the business including same store sales, 4‐wall margins, CPG licensing revenues, and operating profits for FY13 as well as a muted view for FY14 versus consensus estimates." As Dougherty explains: "significantly reduced expectations for FY13 and FY14 EBITDA can't justify share valuation near current levels."

I agree. Selling for roughly 100 times earnings, Jamba shares were already priced for perfection before yesterday's announcement. Now it appears that perfection is not an option.

Long-term-growth estimates for the company remain centered around 20% annually, and the company's current P/E -- which remains north of 80 even after the sell-off -- is still too high in light of the growth rate. With Jamba now walking back expectations on that growth rate, there's every possibility that Jamba shares still have further to fall.


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