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Friday's Top Upgrades (and Downgrades)

Rich Smith
December 14, 2012

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 include a new buy rating for Oracle (NASDAQ: ORCL), balanced out by twin downgrades for Southwest Airlines (NYSE: LUV) and Ethan Allen (NYSE: ETH). 

Good news first
Let's end the week on a bright note, and do the buy rating first. This morning, analysts at Janney Montgomery Scott initiated coverage of database superstar Oracle at a rating of "buy" and a price target of $40. With the shares currently selling for under $32, this promises better than 25% upside in the stock -- but is Oracle really worth $40 a share?

At first glance, you might not think so. While Oracle doesn't look particularly expensive at a P/E ratio of less than 16, the fact that analysts are only expecting 12%-or-so annual earnings growth at the company over the next five years suggests the stock is already fairly priced today. But here's the thing: GAAP earnings don't tell the whole tale at Oracle. In fact, this company is a whole lot more profitable than it looks.

For example, the company's cash flow statement reveals that over the past year, Oracle has generated some $13.4 billion in real, cash profits from its business. That's about 31% more than the $10.2 billion in "earnings" it reported. Also, Oracle's ba