This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, two of our top headliners are stocks whose products are healthy, but whose valuations are anything but.
The day begins with upgrades from BB&T Capital Markets for fresh fruit purveyors Chiquita Brands
In a word: no. Let's start with Chiquita. Unprofitable and burning cash, Chiquita may sell products that are heart-healthy, but the stock's not for the faint of heart. Most analysts think Chiquita will grow its profits at 10% per year, but considering that there are presently no profits to grow, that number's basically meaningless.
Fresh Del Monte looks a bit healthier, but is still no bargain at a price-to-earnings ratio of 12 and a growth rate of 7%... and significantly worse free cash flow than what the company is claiming for net income. In sum, it's overpriced at first glance, and probably even more expensive than it looks. So here we have two stocks whose products are good for you, but whose share prices are practically guaranteed to give your portfolio indigestion if you buy 'em.
Silly rabbit. Stocks are for kids!
Today seems to be a day for broad, theme-based investing advice. While BB&T is picking fresh fruit for your portfolio, another analyst is turning to your kid's toy chest instead (and finding very little in there that it likes).
The analyst: Needham & Co. And the stocks it's looking at include pretty much everyone and anyone who makes toys for kids, from Hasbro
Warning that retail sales remain "weak," and that in an election year, parents may give gift-giving short shrift as they focus on the tussle over the White House, Needham says it's "downgrading to Hold ratings from Buy on all toy stocks we cover." In addition to industrywide concerns, the analyst has particular misgivings about the three stocks, which basically run down like so:
- "Hasbro is vulnerable to slow sales of games, girls' toys and preschool toys, whereas boys' toys have generally been stronger."
- "Mattel is vulnerable to slow sales of Fisher-Price preschool products." (Although the analyst concedes that "Barbie has been solid and Monster High has been very strong.")
- Finally, at JAKKS, the analysts cites "stalled sales of Monsuno" as worrisome.
But should you be worried, too? Actually, in two out of three cases, the answer is "yes." Priced at 14.5 and 15.9 times earnings, respectively, neither Hasbro nor Mattel looks like a particularly good bet to outperform the market -- not if all they're able to muster up is the mid-single-digit growth rates that Wall Street is projecting. Of the two, Hasbro looks like the slightly cheaper company, based on its superior free cash flow production. But really, neither stock looks particularly attractive.
JAKKS, on the other hand, may hold some promise. While apparently "unprofitable," this eclectic toy maker is working like Santa's elves, diligently producing positive cash profits below the surface. Free cash flow for the past 12 months amounted to a respectable $26.4 million -- enough to give the stock a 15 times free cash flow valuation, or an even better 11 times multiple when valued net of its cash reserves (i.e., enterprise value).
Thus, depending on how you look at it, the stock's at worst fairly priced, and possibly significantly undervalued. In any case, it's a better bargain than either of its two higher-profile toy-making peers, and an odds-on bet to outperform them both -- Needham's downgrade notwithstanding.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Hasbro. Motley Fool newsletter services have recommended buying shares of Fresh Del Monte Produce, Mattel, and Hasbro. Motley Fool newsletter services have recommended creating a bear put spread position in Mattel.