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Thursday's Top Upgrades (and Downgrades)

Rich Smith
October 31, 2013

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 downgrades for both financial information website Bankrate (NYSE: RATE) and at-home soda fountain SodaStream (NASDAQ: SODA). But on the plus side ...

Calling Avon a buy
Independent analyst Standpoint Research upgraded shares of Avon Products (NYSE: AVP) to "buy" this morning, assigning the beauty products maker a $22 price target in the wake of this morning's nickel-miss on earnings.

Avon reported earning $0.14 per share in Q3, $0.05 shy of analysts' expected $0.19. Revenues of $2.3 billion likewise missed the mark of $2.45 billion. So why is Standpoint upgrading the shares after this news? Largely, as cited on, because "Avon is down 22% today on 10X its average daily volume," putting the shares "where they were twenty (20) years ago when revenues were just a few bln per year."

Yet today, Avon is a $10 billion-plus company by annual sales, and raking in more than $300 million in annual free cash flow. That certainly makes the stock sound like a relative bargain. But is it a bargain, period?

I vote no. Indeed, count me (in spirit, at least) with the investors who are selling off Avon stock today. When I look at the $300 million and change in cash profits that Avon generated over the past 12 months -- to say nothing of the GAAP losses it's racked up over the past two years -- the company still looks overpriced at a market cap of $7.6 billion. This works out to a price-to-free cash flow ratio in excess of 25, even after today's 20%-plus sell-off. Even if the stock does turn around, and Avon ultimately achieves the 21% earnings growth target that most analysts assign it, I think the stock costs too much. As much as it's fallen already, I think there's more downside ahead.

Aside from that, Mrs. Lincoln, how was the play?
So, if that's the verdict on today's featured upgrade, surely we can expect little out of the two stocks that rival analyst Stifel Nicolaus downgraded this morning: consumer-facing stocks Bankrate and SodaStream. Right?

Let's find out, starting with Bankrate.

Yesterday, Bankrate missed estimates pretty badly, reporting Q3 earnings of $0.13 per share, versus the $0.15 that Wall Street had anticipated. Adding to the bad news, the company advised that its CEO, Thomas Evans, is stepping down to be replaced by current COO Kenneth Esterow. Stifel Nicolaus responded to these developments by pulling its "buy" rating from the stock today, and downgrading to "hold." And Stifel may be right about that.

Based on its most recent financial data, Bankr