Friday's Top Upgrades (and Downgrades)

Analysts shift stance on Dominion, Deckers Outdoor, and MercadoLibre.

Feb 28, 2014 at 2:32PM

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 lowered ratings at Dominion (NYSE:D) and Deckers Outdoor (NYSE:DECK), but a 180-degree reversal to the upside, as one analyst opines:

MercadoLibre? Buy it now!
Shares of MercadoLibre (NASDAQ:MELI) -- the "Argentinean eBay" -- skyrocketed in Friday trading after the online auction house reported Q4 earnings far exceeding estimates. The $0.93 per share that MercadoLibre reported earning last quarter was $0.15 ahead of expectations, and the company's revenues, $134.6 million, beat expectations as well.

Commenting on the results, CEO Marcos Galperin noted that "strong fourth quarter results showed positive momentum in marketplace and payments as we kept driving improvements to user experience. I look forward to more innovation in 2014..." He's not the only one. Following the release of the report, analysts at Stifel Nicolaus did a quick 180 on their opinion of the stock, removing their sell rating and replacing it with a buy. But I think they jumped the gun.

MercadoLibre's earnings number looked impressive, no doubt, from a GAAP perspective. But the company's quality of earnings remains exceedingly low. Free cash flow for the year amounted to less than $29 million, a steep decline from 2012 levels and barely enough to give the company $0.24 in real cash profits for every $1 in claimed "earnings."

As a result, if the stock looks expensive to you at 40 times GAAP earnings, it's downright outrageous when valued on free cash flow -- trading for a multiple to FCF of 163. Even if the company succeeds in growing earnings at the 25% growth rate that analysts project, it's hard to see how these multiples to earnings and free cash flow could be justifiable.

And speaking of steeply priced stocks...
Deckers Outdoor is clearly another one. I warned against investing in this overpriced stock last month, and now investors are seeing why. Despite "beating earnings" every bit as soundly as MercadoLibre just did ($4.04 per share earned in Q4, or $0.26 better than predicted), Deckers shares are slumping 13% on worries that the company's having to spend too much to keep its growth going.

This morning, analysts at Jefferies & Co. cut their rating on the stock to hold and sliced 25% off their price target (now $75) in response to an "overly aggressive spending plan for 2014 and a softer than expected revenue outlook" that the company announced with its earnings release. Their peers at Goldman Sachs likewise highlighted "management's continuous need to invest" as a danger to the shares, and noted that Deckers' promises of a revenue growth rate "in the low-double digits" seem out of line with what other shoe retailers are projecting. Thus, the company may be overly optimistic.

However much it ultimately grows sales, most analysts doubt Deckers will be able to achieve anything more than high-single-digit earnings growth over the next five years. Given this, the company's P/E ratio of 17.5 looks steep. Combined with debt levels that are high and free cash flow often lagging net income, it's unlikely this stock will outperform the market going forward.

Dominion downgraded
Last and least, we come to Dominion, our only stock downgrade. This one got cut to hold at Argus Research this morning following an 18.5% run-up in stock price since September. says the downgrade was a "valuation" call, and if that's the case, it's easy to see why Argus might be nervous.

Unprofitable over the last 12 months, and burning cash for even longer than that, Dominion shares sell more than 18 times next year's potential profit -- despite having a projected earnings growth rate of less than 7%.

The company hasn't generated a penny's worth of free cash flow since 2001, but it's built up a boatload of debt -- more than $23 billion worth, against just $316 million in cash. While an essential utility, and unlikely to ever actually go "out of business," as a business, Dominion is no great shakes. Argus is right to downgrade it.

Motley Fool contributor Rich Smith has no position in any stocks mentioned, and doesn't always agree with his fellow Fools. Case(s) in point: The Motley Fool recommends Dominion Resources. It recommends and owns shares of MercadoLibre.


1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers