Thursday's Top Upgrades (and Downgrades)

Analysts shift stance on ComScore, Applied Materials, and Under Armour.

Mar 21, 2014 at 8:51AM

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 both comScore (NASDAQ:SCOR) and Applied Materials (NASDAQ:AMAT). But it's not all good news. Before we get to those two, let's find out why one analyst is calling...

Time out on Under Armour
Three days after stock market superstar Under Armour (NYSE:UA) announced plans to cut its shares in half with a 2-for-1 stock split, analysts at Sterne Agee announced a cut of their own -- reducing Under Armour's rating from buy to neutral.

Why? As related by this morning, Sterne thinks the 40% run-up in Under Armour shares so far this year has given investors about all the profit that they're going to get already. With the stock trading at 65 times Sterne's estimate for fiscal 2014 profits, the analyst thinks UA shares already cost plenty.

Clearly, they're right about that. I don't know how much UA will end up earning this year (hint: neither does Sterne, for sure). But valued on what UA has already earned, the stock's selling for 80 times trailing earnings and an astounding 396 times trailing free cash flow. Most analysts who follow the stock -- Sterne included -- see a bright future for Under Armour's business, predicting earnings will keep on growing at better than 23% annually over the next five years. But even strong growth of this kind isn't enough to justify a P/FCF ratio pushing 400.

It's a valuation pushing the absurd -- and good reason to exit the stock before the inevitable pullback.

comScore books a win
Twenty-three percent growth is a pace few companies can achieve and maintain. And yet, the second stock on today's list is actually expected to exceed it. The stock is digital media expert comScore, and the analyst recommending it is Brean Murray.

This morning, Brean announced initiation of coverage on comScore with a buy rating and a $40 price target that suggests about 22% upside from today's prices. Brean calls comScore "a leader" in the "growing rapidly" $2 billion market for "digital measurement and analytics," and predicts the company will benefit from "the convergence of online and TV advertising into digital advertising," growing revenues rapidly.

comScore isn't an obviously cheap stock, of course. It has no trailing profits, for one thing, and its valuation on "forward earnings" is a steep 130 times. But with $40 million in trailing free cash flow, the stock's not egregiously overpriced for the 25% long-term growth rate that most analysts ascribe to it.

Personally, I actually prefer valuations based on real, cash profits -- free cash flow -- versus those based on more malleable GAAP earnings. For that reason, I give more credence to Brean's arguments than to many Wall Street recommendations. While I still think the stock is pretty pricey, most stocks are expensive today. Maybe in an environment like this the fact that comScore is only moderately overpriced, instead of vastly overvalued, really is enough to make the stock a buy...

Back to reality
And at last, we come to the least of today's three featured stocks -- at least from a growth perspective. Analysts have only modest expectations for established semiconductor manufacturing equipment maker Applied Materials, predicting long-term growth rates of only 9% per year. That's not keeping Nomura Securities from initiating the stock with a buy rating of its own, however.

Today, Nomura cited Applied Materials' short-term earnings power as a reason to buy the stock, arguing the company could earn $2 a share in 2015 -- far more than the $1.35 per share that other analysts predict. If Nomura is right, that will be nearly twice the $1.12 in profits that Applied Materials is expected to earn this year, and far more than the 20% one-year earnings growth that everyone else is looking for. It would also reduce the company's P/E ratio from the heady 50-plus multiple we see today, to a modest P/E of just 10.

Between its 9% projected long-term growth rate and the 2.1% that Applied Materials pays out to its shareholders as a dividend, I think a P/E of 10 could be very rewarding to long-term investors. When you get right down to it, the stock on today's list with the least attractive growth rate just might turn out to be the most attractive investment prospect of the bunch.

Rich Smith has no position in any stocks mentioned, and doesn't always agree with his fellow Fools. Case in point: The Motley Fool recommends and owns shares of Under Armour.

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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