Monday's Top Upgrades (and Downgrades)

Analysts shift stance on Fifth Third, JPMorgan, and Restoration Hardware.

Jul 21, 2014 at 12:15PM

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 a pair of new buy ratings for bankers Fifth Third Bancorp (NASDAQ:FITB) and JPMorgan Chase (NYSE:JPM). Before we get to those two, though, let's take a quick look through the windows at Restoration Hardware (NYSE:RH), and find out what's going on in there.

Hard news for Restoration Hardware
Shares of the home furnishings retailer followed the market down on Monday, off more than 1 percentage point in early afternoon trading. For this, you can (in part) blame BB&T Capital, which just downgraded the stock to neutral.

Restoration Hardware shares are up 25% over the past 52 weeks, racking up about half-again the gain of the S&P 500. Problem is, this leaves the company vulnerable to accusations that it has become overvalued -- and that's just what BB&T said about the stock today.

With the stock priced at a staggering 189 times earnings, the accusation is not without merit. Even though most analysts who follow the stock think Restoration Hardware has bright days ahead, and will grow earnings north of 26% annually over the next five years, 189 times earnings is a hard price to swallow -- especially once you realize that these "earnings" are basically illusory.

According to Restoration Hardware's cash flow statement, while the company reported "earning" $20 million worth of "profit" over the past year, it actually burned through more than $50 million in cash. Indeed, according to data from S&P Capital IQ, this company has been free-cash-flow negative for the past four-and-a-half years. With cash flow trending lower than last year, and capital spending trending up, there seems little chance we'll see any immediate improvement in Restoration Hardware's negative FCF number.

Long story short, I think BB&T is right to downgrade the stock. Seems to me, Restoration Hardware shareholders are looking forward to some hard times ahead.

Should you bank on Fifth Third?
Turning now to banking news, shares of Cincinnati-based Fifth Third Bancorp are dodging the downturn on the markets with a little help from brother banker R.W. Baird. Following last week's earnings "beat" ($0.49 per share reported for the second quarter, which was $0.06 better than expected), Baird upgraded Fifth Third shares to outperform and assigned the stock a $23 price target.

Not everyone is so optimistic. After all, while it admittedly "beat" earnings, Fifth Third reported a 26% drop in second-quarter profit last week. As good news goes, that wasn't exactly all we'd hoped to see. That most analysts who follow Fifth Third expect the company to post sub-1% earnings growth over the next five years isn't particularly encouraging, either.

That being said, the stock sells for a seemingly cheap 10.7 times earnings valuation, which is about 24% cheaper than its peer regional Midwest banks. Its shares also sell for just 1.5 times tangible book value, which is also pretty attractive. And Fifth Third's 1.2% return on assets and 10.6% return on equity, while not stellar, are both respectable figures.

All things considered, while it's hardly my favorite stock in the banking sector, I can't say that Baird is totally off base in recommending the stock on its potential to bounce back from the second quarter's disappointing results.

Do you have something in an XL?
Our other big banking upgrade of the day is an order of magnitude bigger than regional Fifth Third -- international megabanker JPMorgan Chase. Yet just like Fifth Third, JPMorgan reported a sizable earnings beat last week -- topping expectations by $0.26 with a $1.59 per-share profit in the second quarter.

This morning, JPMorgan received its reward when FBR Capital upgraded the stock (also to outperform) and assigned a $70 price target. Quoted on, FBR argued that "investor expectations have been reset and JPM shares should benefit over the next year as the economy and the prospects for positive catalysts improve." Indeed, analysts who follow JPMorgan stock still predict that the bank will earn only $5.48 per share. But FBR thinks $5.77 is achievable.

If FBR is right, then JPMorgan shares that today sell for 14.4 times trailing earnings could soon cost barely 10 times. Between the stock's long-term projected earnings growth rate of 4.5% and its 2.8% dividend yield, this suggests that JPMorgan shares are almost cheap enough to buy.

Of course, there are caveats to that argument. For example, at 0.65% and 7.4%, respectively, JPMorgan's return on assets and return on equity are both inferior to the numbers at much smaller Fifth Third. They're mere fractions of the numbers being posted by top-quality operator Wells Fargo (NYSE:WFC), which earns 1.5% on its assets and 13.5% on its equity.

But even so, at just 1.4 times tangible book value, JPMorgan Chase is in at least one respect even cheaper than smaller Fifth Third. Plus, it pays a bigger dividend, is expected to grow earnings faster, and offers a more diversified, presumably more stable, investment.

Again, this is not my favorite banking stock. But if you agree with Baird that Fifth Third is a stock worth looking at for investment, you'll probably agree with FBR that JPMorgan Chase is an even better opportunity.

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Fifth Third Bancorp, JPMorgan Chase, and Wells Fargo.

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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