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 include an upgrade for Facebook (FB 1.08%), but downgrades for both Sprint Nextel (S +0.00%) and Reliance Steel (RS +2.15%). Let's dive right in.
Deutsche Bank likes Facebook
Our first notable ratings move of the morning is Facebook, which just scored an upgrade from the friendly analysts at Deutsche Bank. According to StreetInsider.com, which reported the rating this morning, Deutsche thinks Facebook has more "revenue momentum than any other company they cover." The analyst is projecting growth in ad revenue alone of 40% in 2013, and predicts an astounding fourfold increase in quarterly revenue from Newsfeeds by the end of 2013.
That all sounds good, of course ... but if Facebook's so hot, then why is its stock off 1.6% despite the upgrade today?
The answer, of course, is valuation. Deutsche may see 40%-plus revenue growth at the company, but most analysts on Wall Street are still predicting the stock will top out below 30% growth over the next five years -- and fast as that is, it's just not fast enough to support the stock's current valuation of more than 160 times annual profits. Facebook's a great company, no doubt. But its price is just too high.
Sprint stalls
Speaking of stocks that cost too much, Sprint shares had a banner year in 2012, and are up 168% over the past 12 months. But its run may now be done. This morning, analysts at JP Morgan announced they were pulling their overweight rating on Sprint, and downgrading the stock to neutral.
Honestly, this doesn't look like such bad news for shareholders, though. JP's maintaining its $6 price target on the stock despite the downgrade, after all, suggesting it's not necessarily turning pessimistic on Sprint. Rather, the analyst is simply acknowledging, in effect: "Hey, we said to buy the stock because it's going to $6. It's gone to $6. So you can stop buying it now."
All that said, even if JP isn't necessarily pessimistic about Sprint's stock, I am. 168% gain or no, Sprint remains a deeply unprofitable operation, and pretty much no one on Wall Street expects to see Sprint turn a profit in 2013. The company's carrying $15 billion in net debt, and while rivals AT&T and Verizon are in similar straits, debt-wise, at least they seem able to turn a profit despite their debt loads. To date, Sprint hasn't figured out that trick just yet. You should wait to see if they can figure it out before buying.
Can you rely on Reliance Steel?
Now, if you're looking for a stock that Wall Street does see some problems with, look no further than Reliance Steel & Aluminum. This morning, KeyBanc Capital Markets upgraded shares of Commercial Metals, of Nucor, and of Steel Dynamics -- of pretty much everybody involved in steelmaking, in fact. Except for Reliance Steel. And that one they downgraded.
Why? KeyBanc says it's feeling cautious about the prospects for U.S. metal service centers like Reliance, worrying that first-half 2013 sales volumes are looking weak, and pricing power low. KeyBanc is predicting weak profit margins in this industry sector -- and Reliance already isn't super-strong in the profit margins department, netting fewer than $0.05 per share profit on each dollar of goods sold.
At 12.3 times earnings, and a growth rate stuck in the single digits, Reliance may not be the most expensive stock on the market, but it's no bargain at today's prices. KeyBanc says you should only hold it. I think a wiser choice might be to go ahead and sell.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Facebook and Nucor. The Motley Fool owns shares of Facebook.
