Wednesday's Top Upgrades (and Downgrades)

Analysts shift stance on Yelp, ExxonMobil, and Chevron.

Apr 9, 2014 at 3:31PM

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, we'll be looking at a pair of new ratings out of Jefferies, as it initiates coverage on the oil and gas sector, giving Chevron (NYSE:CVX) the thumbs-up but ExxonMobil (NYSE:XOM) the thumbs-down. But, first, the latest news on Yelp (NYSE:YELP).

More help for Yelp
On Wednesday morning, yet another banker joined the crowd of analysts shouting in chorus, "Buy Yelp!" If you're counting, then combined with the upgrade to outperform from Oppenheimer Monday and the upgrade to buy from SunTrust yesterday, this makes a total of three analysts recommending Yelp shares in the past three days.

As with the other analysts' recommendations, today's buy argument from CRT Capital is elegant in its simplicity: "Since reaching a record high of $101.75 on March 5, 2014, YELP shares have fallen as much as 33%. With no real fundamental reason for the precipitous drop in stock price... We now view valuation as somewhat more attractive."

This raises the obvious question, though: "More attractive than what?" Sure, CRT is right about Yelp shares being cheaper today than they once were. But as I've said twice in as many days already, the fact that Yelp is not earning profits is generating almost no free cash flow and sells for a triple-digit multiple to the profits that it might (or might not) earn next year all suggest this is one extremely overpriced stock -- even if it is 33% less extremely overpriced than it was a few weeks ago.

Indeed, CRT's own argument in favor of buying the stock, that it sells for such ridiculously pricey valuations as "11x 2015 Price/Sales" and costs "49x EV/EBITDA" suggest there's little fundamental reason to want to own this stock, other than the fact that it's a bit cheaper today than it once was. That still doesn't make Yelp shares cheap. And it's still not a good reason to buy them.

A bargain in oil and gas?
So where should investors look for bargains? According to Jefferies, one place to start looking might be the oil and gas sector.

This morning, Jefferies initiated coverage on Chevron with a buy rating, setting a $140 price target on the stock. quotes the analyst arguing: "We believe that Chevron has the best medium-term growth prospects in the integrated oil sector, its valuation parameters are attractive, and the dividend provides downside support. Chevron's growth projects have high margins that are accretive to its industry-leading position."

Strangely, though, if you compare Chevron's projected five-year earnings growth rate (5.6%)to the average growth estimates in its industry (16.9%), the company doesn't actually appear to fare so well. Comparing growth to valuation, the result is similar, with Yahoo! Finance figures showing Chevron to have a five-year forward PEG ratio of 1.9 -- nearly identical to the 1.92 PEG for the oil and gas industry as a whole.

Granted, when you add Chevron's 3.4% dividend yield to its expected rate of earnings growth, you wind up with an expected 9% total return from the stock. That looks like an argument in the stock's favor, up until the point when you notice that Chevron's free cash flow -- never a really strong point in the stock's favor -- recently plunged deeply into negative territory. While the company's income statement still shows Chevron producing good ($21.4 billion) in GAAP profits, Chevron's cash flow statement clearly shows that the company is burning cash -- and, arguably, a much worse value than what Jefferies makes the stock out to be.

Is bigger better?
In contrast to its enthusiasm over Chevron, Jefferies takes a dim view of the prospects for larger oil major ExxonMobil. Initiating coverage of this stock with only a $96 price target (less than Exxon shares sell for today), Jefferies rates Exxon only neutral, pointing out that "relative to other integrated oil stocks Exxon is expensive, lags in growth prospects and offers the lowest dividend yield."

And this time, Jefferies is right on the money. Exxon's 2.6% dividend yield does lag the payout of its rivals. Its projected growth rate is an anemic 3%, and at 13.2 times earnings, the stock looks overpriced relative to the competition. In Exxon's defense, the company is generating positive free cash flow, but the $11.2 billion it pumped out of the ground last year falls far short of the $32.6 billion it claims to have earned under GAAP accounting rules.

In short, if Chevron isn't generating enough cash from its business to justify the buy rating Jefferies graced it with, then Exxon probably doesn't deserve even the neutral rating the analyst reluctantly assigned it, either.

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 both Chevron and Yelp.

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