This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. This morning, we look at (yet another) upgrade for Capital One (NYSE: COF), one more for Vertex Pharmaceuticals (Nasdaq: VRTX) as well, and just for a change of pace, we'll end with the downgrade that met Marathon Oil (NYSE: MRO) this morning. Let's begin.
What's in your portfolio?
Following on the heels of last month's blowout first-quarter earnings report ($2.72 per share in profit, a 37% increase versus last year's Q1), analysts at Argus threw in the towel this morning, suspended their sell rating, and upgraded the stock to "hold."
Argus sees a stronger U.S. economy leading to increased consumer spending, and this logically implies greater revenues and profits for Capital One. Over the longer term, the analyst continues to question Capital One's ability to compete against bigger players in the banking market, but investors shouldn't worry too much about that. Argus has been wrong about Capital One before (big time), and it's wrong to doubt the firm's staying power now.
With returns on both equity and assets that put rivals such as Citigroup and JPMorgan to shame, Capital One is clearly a contender. And with a 7.3 P/E that even after its run-up remains below the bank's long-term predicted growth rate of 8.7%, the stock should be a contender for a place in your portfolio as well.
Calculate the vertices
A riskier bet, but one that could pay off even better, comes courtesy of Needham & Co., which this morning recommended buying shares of cystic fibrosis drugmaker Vertex Pharma. Yesterday, Vertex released clinical data showing "significant improvements in lung function" from use of its VX-809 and Kalydeco treatments, now in Phase 2 trials. The news sparked a raft of upgrades from analysts yesterday, and while slower than its peers, Needham is no less enthusiastic today.
The analyst targets a share price of $65 within a year -- but even this number could prove conservative. Vertex is already within $4 of hitting that mark, after all. And while the stock costs a pretty penny (44 times earnings), Wall Street is looking to see better than 50% annualized profits growth over the next five years. That won't be an easy target to hit, but if the analysts are right, even 43 times earnings isn't too high a price to pay for Vertex.
Running a slower Marathon
Of course, it's not all caviar upgrades and Champagne dreams on Wall Street. There is some bad news to report, too. This morning, investors awakened to good news in The Wall Street Journal, which predicts that gas prices that have dropped to $3.79 on average across the country may continue to fall -- and are "highly unlikely" to hit the $4 to $5 levels that were being predicted only a month or so ago.
Such trends worry oil company investors. With tensions over Iran's nuclear program damped down, and European economic weakness depressing demand for oil, prices of the crucial commodity are slipping. This morning, analyst Howard Weil took a look at the trend and decided to downgrade shares of Marathon Oil. Before you panic, though, note that this downgrade was only to "market outperform" -- a rating that in any other stock would sound pretty good. (The difference is that Weil previously had Marathon rated a "focus stock," or one of its favorite picks.)
Whatever you call the new rating, though, the numbers still argue in favor of Marathon rewarding investors handsomely. This stock costs less than eight times earnings, after all, and is expected to post earnings growth in excess of 7% per year going forward. Add in the modest dividend, and the stock should beat the market handily. And if Marathon should decide to raise that dividend a bit (currently, only 22% of net profits are devoted to dividends), Marathon could easily run away from the pack.
Right now, Marathon only pays out 2.5% in dividend yield annually. Over the past five years, though, its dividend has averaged 3.3%... and returning to that level would still permit Marathon to reinvest 70% of its income stream in operations. So will Marathon boost its divvy? Draw your own conclusions.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of JPMorgan Chase and Citigroup. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
