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Tuesday's Top Upgrades (and Downgrades)

Rich Smith
April 15, 2014

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 upgrades for retailers Pier 1 (NYSE: PIR) and New York & Co. (NYSE: NWY). The news isn't all good, though, so before we get to those two, let's take a quick look at why.

PetSmart is in the doghouse
PetSmart (NASDAQ: PETM) investors are being treated to a dog's breakfast today, as shares of the pet supplies superstore tumbled 3% this morning in response to a downgrade from Bank of America/Merrill Lynch. Last quarter, PetSmart reported a 4% decline in sales and a 2% decline in profits, and its stock price has been lagging the rest of the market this past year.

To some, this might be an argument in favor of buying PetSmart -- the lagging stock price. Selling for less than 17 times earnings and about 14 times free cash flow, PetSmart actually looks pretty fairly priced for its 13%-plus growth rate and 1.1% dividend yield. But according to Merrill, it's an increase in competition in the pet supplies sector that has it most worried about PetSmart.

The banker may be right. While publicly traded, direct competitors to PetSmart are hard to find (Petco's the most obvious, but it's now gone private), there's indirect evidence of the effect competition is having on the company in its declining revenues. While PetSmart may be a fair value at 13% growth, continued declines in sales and profits will make the stock much less attractive to investors.

While I won't run all the way out on a limb and agree with Merrill Lynch that the stock needs to be sold at this price, unless and until management proves it can turn the growth engine back on, Merrill's probably right to be cautious.

New York, New York?
Next up, New York & Co. Janney Montgomery Scott picked this one as a buy today, and the upgrade is having a marked effect on this low-dollar-priced stock (currently priced at less than $5 a share). New York & Co. stock is up nearly 5% as of this writing in response to Janney's assertion that the company's new lines of spring clothing are "trend-, target-, and price-right," that same-store sales are stable to up, and that there's a "margin expansion opportunity."

The stock's no obvious bargain, however. Trailing P/E on this one is a lofty 116 times earnings, while the price-to-free cash flow is a more palatable, but still pricey, 30 times ratio. Most analysts seem to agree that the best New York & Co. can expect to grow