Monday's Top Upgrades (and Downgrades)

Analysts shift stance on Facebook, PotashCorp, and Agrium.

Mar 17, 2014 at 1:30PM

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 upgrades for fertilizer stocks PotashCorp (NYSE:POT) and Agrium (NYSE:AGU). But it's not all good news, and before we get to those two, let's take a quick look at an even higher-profile stock, and find out why one analyst is...

Smacking down Facebook
It's been weeks since Facebook (NASDAQ:FB) shocked investors with its $19 billion purchase of WhatsApp, but not everyone has gotten over the initial surprise. This morning, Argus Research cited the "eye-popping price of the WhatsApp acquisition, announced on February 19" as one key reason behind its decision to downgrade Facebook shares to hold.

Quoted on this morning, Argus argued that "Facebook has had a very strong run over the last year despite concerns that teens might desert the site." In Argus' view, this is the right way to look at the stock, which it said still has the potential to exhibit "long term growth in the user base."

What worries Argus, though, is that "the immediate monetization of existing services" seems to be of secondary concern to Facebook: "We are concerned about the impact of this strategy shift and the risks of the WhatsApp acquisition." And Argus has good reason to worry.

Facebook shares cost an astounding 110 times trailing earnings, along with a cheaper-but-still-pricey 60 times free cash flow. At these valuations, the shares look overpriced even if the company achieves the 32% annualized profit growth rate that Wall Street has it pegged for. Argus' suggestion that Facebook may not be too concerned about boosting profit, meanwhile, suggests CEO Mark Zuckerberg may not be too concerned about achieving this growth rate -- with potential disastrous consequences for his shareholders if he "misses."

It's a scenario that cries out for caution, and Argus' cautious hold rating is the right way to play it.

Praise for PotashCorp...
Facebook's shares have been made more risky by their 155% run-up in price over the past year. In contrast, one analyst sees some "derisking" going on in shares of fertilizer producer PotashCorp, which have become 15% cheaper over the past 52 weeks.

Priced today at less than 17 times earnings, and expected to have relatively stable profits over the next year, PotashCorp shares are no great bargain given the stock's mere 7% projected growth rate. Worse, the stock's free cash flow continues to lag reported net income, with the result that Potash shares sell for a steeper price-to-free cash flow ratio of more than 18.

Personally, I think that's too much to pay for shares of a 7% profit-grower. But I do admit that the stock's dividend yield of more than 4% seems generous. In fact, this dividend yield may help to explain why this morning, Cowen announced it was upgrading shares from sell to market perform despite the stock's seemingly rich valuation.

While I wouldn't buy PotashCorp at today's share price, I understand why dividend investors, at least, might find it to tempting to sell.

... and for Agrium, too A second stock winning higher marks from Cowen this morning is PotashCorp's fellow fertilizer producer Agrium. Like PotashCorp, it's a profitable producer, and selling for a low P/E (of just 13.2). Like PotashCorp, Agrium pays a fine dividend yield (of 3.2%). And like PotashCorp, it's winning an upgrade to market perform.

But this one I don't agree with at all. PotashCorp is a stock with a low P/E and weak free cash flow that still gives it a nearly as low price-to-free cash flow ratio. But Agrium, despite having an even lower P/E ratio, currently generates no free cash flow at all. To the contrary, Agrium burned through about $101 million in cash last year, worsening the problems of a balance sheet that shows $3 billion more debt than cash.

The stock also hasn't shed as much market cap as has PotashCorp, either. Agrium shares fell only 7% over the past year, and consequently haven't eliminated as much downside risk as its peer.

Long story short, given the low quality of Agrium's reported earnings, I suspect the stock has farther to fall before it hits bottom. My hunch is that Cowen jumped the gun on this one, and removed its sell rating too soon.


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 Facebook, and The Motley Fool owns shares of both Facebook and PotashCorp.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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