Monday'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 a lowered price target at Yandex (NASDAQ: YNDX  ) , and an actual downgrade for The Container Store (NYSE: TCS  ) . On the plus side, though, one analyst is...

Tuning in to Comcast
You've probably heard the news about Comcast  (NASDAQ: CMCSA  ) by now. On one hand, the nation's biggest cable company is aiming to get even bigger by swallowing Time Warner Cable. On the other hand, it's also getting richer, inking a deal to have Netflix pay it to connect its own streaming video service directly to Comcast's "pipes."

The first development promises to add millions of paying customers to Comcast's subscriber rolls, roll back erosion from its cable customer base due to defections to satellite TV and pure Internet service, and increase its bargaining power with the networks. The second development could be even better news -- adding millions of dollars to Comcast's bottom line.

Little wonder, therefore, that this morning, analysts at Pacific Crest gave an unqualified thumbs-up to Comcast's prospects, upgrading the shares to "outperform" and assigning the stock a $66 price target. And they're right to do so.

Priced at just 20 times earnings, and expected by analysts to grow these earnings at 19% annually over the next five years -- before the added profit from Netflix gets factored in -- Comcast was already looking like a pretty decent bargain before this good news arrived. Now, when you consider that Comcast is actually cheaper than it looks, generating $7.6 billion in trailing free cash flow, but reporting only $6.8 billion in GAAP earnings, the case for buying this cable giant is even stronger. If Comcast succeeds in winning regulatory approval for its Time Warner merger, the stock will become more attractive still.

Yawning at Yandex
Now for the bad news -- not all stocks are such great bargains. Take "Russia's Google," Yandex, for example. At the same time it was singing Comcast's praises, Pacific Crest was cutting its price target on Yandex this morning. Previously thought to be worth $48 per share, the stock's now pegged for just $41 -- less than 14% above where it sells today.

That's not a huge amount of profit potential Pacific Crest is promising for a stock that's arguably already overpriced at 28 times earnings... and nearly 40 times free cash flow. Analysts on average think Yandex is capable of growing its earnings at about 30% annually over the next five years. But in fact, Yandex only managed 24% growth last quarter, and as a general rule, companies tend to slow their growth rates over time -- not speed them up.

Given that so much of Yandex's value is dependent on the company achieving a growth rate that has already started to stumble, I'm of the opinion that Pacific Crest is right to be rolling back expectations for the stock. My only quibble: I'm not convinced the stock even deserves the outperform rating Pacific Crest still gives it.

Container Store gets its ears boxed
Last and least, we come to The Container Store, which just got hit by the equivalent of a sell rating (underperform) by Merrill Lynch. Merrill is warning of "risk to 4Q EPS" -- i.e., a potential miss. The banker also notes that "TCS's P/E multiple which is at significant premium to hardline peers" could be compressed. It's right to worry.

Unprofitable today, and priced north of 50 times next year's expected earnings, The Container Store certainly sells for a pretty penny. Things aren't quite as bad as Bank of America makes them appear. While "unprofitable" over the past 12 months, The Container Store did at least generate a bit of positive free cash flow.

The problem is that these cash profits that it produced -- $4.7 million -- aren't nearly enough to justify the $1.6 billion price tag Wall Street investors have hung on this stock. This works out to a nosebleed 340 times free cash flow valuation on The Container Store, which is too much to pay even if the company achieves the 28% compound annual growth rate analysts are hoping it will produce.

Simply put, it's an astoundingly expensive stock, and probably not one you want to own at these prices. Merrill Lynch is right to downgrade it.

Rich Smith has no position in any stocks mentioned, nor does he always agree with his fellow Fools. Case(s) in point: The Motley Fool recommends Netflix, The Container Store Group, and Yandex. The Motley Fool also owns shares of Netflix.

 


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2014, at 7:29 PM, JOKEonME wrote:

    new too investing, subscribed to motley fool and loaded up on ur recommendations TCS and PII. needless to say my account looks like what the cow left behind (retired dairy farmer here) what really pisses me off is it looks like u didn't take ur on advice on TCS and buy into Mr Tindell's dream Just hope some of ur other advice pans out in long run

  • Report this Comment On February 24, 2014, at 7:55 PM, rdcrock wrote:

    I'm sure you are not the only one hurting on this one. Lesson learned, don't hang your hat on only one source. There are a lot of free services or services with a minimal fee that will provide you with a lot of information. Yes, many of the fools stocks are much higher now...but...they have been bought and held for long periods of time. Meaning among other things, you can add to your position now and even lose some money but be ahead in the long run. I had facebook at $38.00 and if I would add to that position now, the stock could still have a pullback and I would still be ahead. Another example would be the recent recommendation of WWAV. It just had a big run up and Credit Suisse has a one year target of $29.00. I have little doubt it will be worth more, but not for some time. AND if you are retired or about to retire, active trading and holding probably isn't where your money should be.

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