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 StreetInsider.com 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.

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 fool.com.

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 www.fool.com/beginners, 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 www.fool.com/podcasts.

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