Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

It's a great day to own fertilizer companies, as the new week opens with a series of stock upgrades by investment banker Cowen & Co. This morning, Cowen announced upgrades to outperform for three of the biggest names in the sector: CF Industries (NYSE:CF), Mosaic (NYSE:MOS), and CVR Partners (NYSE:UAN). According to the analyst, CF shares that cost less than $42 today should rise 19% to $50 a share within the next 12 months, Mosaic stock could hit $32 -- a near 20% profit -- and CVR stock could gain 24% to reach $4.25 per share.

Here's why.

Red and green arrows pointing down and up, respectively, laid over stock percentage movements on digital screen

Image source: Getty Images.

Fertilizer advice from the horse's mouth?

Details on Cowen's reasons for upgrading these three stocks are hard to come by. As of this moment, all StreetInsider.com is able to confirm is that the ratings were issued, and the stocks' target prices changed. But surveying recent news events, it's possible the analyst's optimism was inspired by a report from Mosaic.

At the end of last week, Mosaic issued its latest weekly "Plant Nutrient Price Dashboard" update, along with its corollary "Plant Nutrient Affordability" index.

According to these charts, fertilizer prices (phosphate and potash in particular) remain generally in an uptrend, with most regions that Mosaic monitors showing prices either rising or holding steady -- despite remaining below their long-term average since 2010. At the same time, crop prices (which farmers depend upon to provide the cash needed to buy fertilizer from companies like Mosaic, CF Industries, and CVR Partners) ticked up last week, rising 4% in comparison to the prior week.

Result: Fertilizer became a bit more affordable for farmers to buy, even as the prices they'll be paying Mosaic and its peers got more profitable for the companies.

More from Mosaic

Mosaic's latest update shows "affordability" improving, as represented in a ratio of 0.68 on the index. As Mosaic explains on its website, "the affordability metric is the ratio of a plant nutrient price index and a crop price index," using prices prevalent in 2005 as its baseline. "A ratio less than one indicates that plant nutrient products are more affordable than during the base year," says the company. Thus, seeing the affordability index ratio decline is good news for Mosaic -- and for CF and CVR as well.

This ties into a recent positive trend in pricing, as Mosaic described in its post-Q4 earnings conference call last month. In that call, Mosaic CEO James O'Rourke explained: "Potash and phosphate prices have been low for several years, in large part because of expectations of significant new capacity."

And yet, "as those new tons begin to come to market, prices have moved upward," O'Rourke said, because "global potash and phosphate demand has continued to grow" faster than supply can expand.

The fears of oversupply may have been an overreaction. "New capacity has delivered fewer tons than expected," Mosaic's CEO told investors. And what new supplies have come to market are being offset by other supplies being curtailed, as producers shut down "higher-cost production" sites. This is helping Mosaic and its peers to maintain pricing power, and when combined with more profitable crops among its customers, they're making higher profits as well.

Fertilizer prices are higher -- great. What about the stock prices?

Of course, this still leaves investors with the crucial question of whether these companies' are earning enough profit to justify their current stock prices -- let alone the ones Cowen is predicting they will reach. And here's where investors may run into difficulty: Currently, two of the three stocks that Cowen is recommending seem to earn no profits at all.

As of their most recent earnings reports, only CF Industries is currently profitable over the past 12 months -- and even CF looks a little expensive, selling for a price-to-earnings ratio of nearly 28. Mosaic and CVR, meanwhile, show negative earnings over the past 12 months.

Before you dismiss all of Cowen's recommendations out of hand, though, let's take a look at one more set of numbers: free cash flow.

By this metric, CVR is also running free-cash-flow negative. But CF Industries and Mosaic are both generating positive free cash flow (FCF). CF reported earning $358 million over the past 12 months, resulting in the P/E ratio mentioned above. But data from S&P Global Market Intelligence confirm that CF also generated positive free cash flow of $1.1 billion during this period. Relative to the stock's $13.6 billion enterprise value (EV), that gives CF an EV/FCF ratio of about 12 -- less than half its apparent P/E ratio.

As for Mosaic, it reported GAAP losses of $107 million -- but positive free cash flow of $115 million. This still leaves Mosaic stock selling for an EV/FCF ratio of 90, however, which seems expensive to me.

With GAAP profits and even stronger cash profits, of the three stocks Cowen is recommending today, I think CF Industries looks like the safest bet.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.