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 new buy ratings for Twitter (NYSE: TWTR  ) and Cedar Fair (NYSE: FUN  ) . But on the downside...

Oracle gets a downgrade
It's been a good five months since independent analyst Standpoint Research recommended that investors jump into shares of tech giant Oracle (NYSE: ORCL  ) following that company's Q4 2013 earnings "miss." At the time, Oracle shares could be picked up at the bargain-basement price of less than $30 -- but Standpoint thought they'd quickly rebound to $36, making for an easy 20% gain.

Mission (almost) accomplished.

Today, Oracle shares stand within just a few cents of Standpoint's prediction, and with most of its predicted gains "in the bag," the analyst is advising investors to take these profits and wait for a new buying opportunity to emerge. Calling Oracle shares "fairly valued now at > 12X" forward earnings, Standpoint worries that Oracle may struggle to grow much past its current market cap of $160 billion. Accordingly, the analyst is downgrading Oracle to hold.

Here, though -- and in contrast to the analyst's call on Coach yesterday -- I disagree.

Priced under 15 times earnings today, Oracle may appear fully priced, or even a bit overpriced for its anticipated 10.6% growth rate and 1.4% dividend yield. But if you factor the company's cash ($15 billion, net of debt) into the valuation and value the company on its $14.2 billion in trailing free cash flow, rather than its smaller $11.1 billion earnings haul, you'll find that Oracle is actually selling for an enterprise value to free cash flow ratio of only 10.2.

This still leaves the stock undervalued and with some room to grow -- about 6%, if investors are realistic; more, if they're feeling optimistic. Accordingly, for the time being at least, Oracle remains buyable.

...and Twitter gets a "buy"
I'm also in disagreement with the other big tech call of the day -- Twitter -- albeit for entirely different reasons.

This morning, MKM Partners initiated coverage of social-media star Twitter with a $50 price target. According to StreetiInsider.com, analysts at MKM are recommending Twitter on the theory that the company is "the best social media property around right now and that it has huge potential for drawing in advertising revenue." Q3 revenue growth of 105% outpaced LinkedIn by two times and was 55 percentage points faster than what Facebook accomplished. "Engagement on the site is incredible, with an average of 7.5 timeline views per day across its entire base of 232 million monthly users," exudes MKM. "This highlights the stickiness of Twitter's user-base and boosts long-term investor confidence."

Of course, no one's arguing that Twitter isn't "sticky," or that it isn't growing revenue rapidly. The problem with Twitter is that the company's losing money at the rate of $142 million a year and burning through its cash to boot. Most analysts doubt that Twitter will see a full-year profit any time before 2017. That's an eternity in tech time. Almost literally anything could happen between now and then, from Facebook developing a Twitter-killing microblog service to people deciding to start using Google Plus (hey, you never know).

Long story short, the stock's incredibly speculative and, at a valuation of more than 40 times sales (more than twice the price of Facebook), too risky to buy without a date certain for profitability.

Invest in fun?
What's a better way to make money in the market? Consider cheaper stocks. Consider steady dividends. Consider just having ... FUN. That's the advice of analysts at FBR Capital, at least, who this morning initiated coverage of amusement-park operator Cedar Fair with an outperform rating and a $70 price target.

Calling the stock "under-appreciated" and "positively inflecting," FBR sees Cedar Fair as "benefiting from new initiatives just beginning to gain momentum from a new management team that had success at Disney." Meanwhile, FBR believes that "consensus estimates" of 6% long-term-earnings growth are too conservative, being derived from "overly cautious" guidance from management. If FBR's right about this, then Cedar Fair could really be a bargain.

Already, the stock's strong free cash flow of $208 million outpaces reported GAAP earnings by 75%. This gives Cedar Fair a 13.3x price-to-free-cash-flow ratio, which makes it much more attractive than its 23 P/E ratio makes it appear. With a 5.9% dividend yield and 6% growth rate, I'd probably call the stock only fairly valued. But if FBR turns out to be right about Cedar Fair growing faster than it's expected to, then the stock really could be a buy.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Coach, Facebook, Google, LinkedIn, and Walt Disney. The Motley Fool owns shares of Coach, Facebook, LinkedIn, Google, Oracle, and Walt Disney.

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