Every day of the workweek, Wall Street's diligent worker bees dole out dozens of upgrades, downgrades, new ratings, and price tweaks on the ratings they've already issued. "Buy" this, "sell" that, "aggressively accumulate" the other -- the instructions come fast and furious, and judging from the shifts in stock price that follow each, a lot of investors closely follow what the Street's best and brightest have to say about their stocks.
But should they?
This new series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we begin with three high-profile ratings moves making the rounds on Wall Street this morning: New buy ratings at Ariad Pharmaceuticals (Nasdaq: ARIA) and Crocs (Nasdaq: CROX), but a big drop in Dell's (Nasdaq: DELL) target price. Let's dive right in.
Amping up Ariad
First up, Ariad Pharmaceuticals got a big "buy" endorsement from Swiss megabanker UBS this morning. Chief among the near-term catalysts UBS sees are the upcoming "Phase I/II data from AP26113 in 2H," and this has the analyst positing a $20 share price on this now-$15 stock within the year. Longer-term, UBS sees even greater profits in store for early adopters of the stock.
StreetInsider.com quotes the analyst gushing about the prospects for Ariad's chronic myeloid leukemia (CML) drug ponatinib, which UBS says "can be a ~$1B drug in 2nd/3rd line CML alone and is worth $14/share." If the analyst is right, this single drug has the potential to double Ariad's stock price.
In the meantime, in between-time, however, be aware: For the time being, Ariad is a deeply unprofitable company, and a fast cash burner. It booked more than $120 million in GAAP losses last year alone, and burnt through $54 million in cash. (The company has more than $300 million stashed in the bank with little debt, so dilution shouldn't be an immediate concern.)
If the shoe fits, buy it
The 30%-ish gain an analyst at Longbow is promising shareholders of Crocs is nothing to sneeze at, either.
And Longbow may be right. At 17 times earnings, Crocs shares may only sound fairly valued -- but that's before you notice that most analysts think Crocs has the potential to run up its profits 25% per year over the next five years. With its copious free cash flow, strong cash reserves and nearly debt-free balance sheet, Crocs looks like a winner.
Dude! Should you really get a Dell?
Finally -- and with apologies for ending on a down note – is Dell. A recent report out of Gartner shows Dell underperforming rivals Apple and Hewlett-Packard in the PC market: "Dell underperformed in most regions compared with a year ago. For the first time in two years, Dell experienced a year-over-year shipment decline in the Asia/Pacific market."
The bad news pushed analysts at Maxim Group to slice $3 off their price target on the stock (about 13%) this morning. Maxim still thinks you should get a Dell, or at least a few shares of the stock, of course. And it's not hard to see why. Priced at less than nine times earnings, Dell doesn't have to exceed expectations (for 5% long-term profits growth) by much to justify its share price. In fact, with $5.6 billion net cash in the bank, and free cash flow that vastly outweighs its reported GAAP profits, Dell just might be even cheaper than it looks.
Motley Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended writing covered calls on Dell.
