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 new buy ratings for National Grid (NGG +0.29%) and Zillow (Z 1.85%). On the other hand, one analyst fears there's...
No playdate for The Children's Place
Shares of tyke clothier The Children's Place (PLCE +3.89%) are sitting out today's market rally, dropping 0.5% (and counting) as the rest of the market rises. For this, you can blame the analysts at Goldman Sachs, who have resumed coverage of the stock with a sell rating ahead of Tuesday's anticipated Q4 earnings release.
According to Goldman, Children's Place faces "structural pressure ... from an increasingly competitive and price sensitive children’s apparel category." More generally, the analyst also worries about the "inherently high execution and fashion risk" of clothing retail as an industry. In other words, consumers are fickle as a rule. And since there are any number of places out there where they can buy kids' clothes -- and buy them cheap -- trying to make a consistent profit in this business is no easy task.
And not just for Children's Place, either. Sad to say, but with the shares selling for north of $17 apiece today and Children's Place pegged for only 8% long-term earnings growth, it's going to be even harder for investors to make a profit on this stock. In short, Goldman's downgrade announcement may not be welcome news for shareholders -- but it's the right call.
No weeping Zillow
Happier news (of a sort) greets investors in online housing voyeur Zillow today, as the stock wins an initiation at "outperform" from the analysts at RBC Capital. With its growth rate pegged for 30% -- three-and-a-half times what Children's Place is expected to produce -- RBC sees Zillow outperforming the market handily.
Unfortunately, so does everyone else. That's why Zillow shares have already run up 65% in price over the past year. And that's why Zillow shares are now too expensive to buy.
With Zillow priced at more than 304 times earnings, there's simply no way to justify the valuation -- not even if the company achieves its targeted 30% growth rate. Not even if it doubles it. RBC's recommendation notwithstanding, this stock's not priced to outperform. It's priced to sell.
National Grid's shockingly good dividend
Had enough of Wall Street analysts hawking dividend-less, overpriced stocks? Take a gander instead at National Grid, recipient of an upgrade to "overweight" from the analysts at HSBC this morning.
While National Grid is not much of a sprinter -- its growth rate is expected to fall below 4% over the next five years -- it's hard to argue with the stock price, or the strong dividend payouts. According to data from S&P Capital IQ, this gas and electric utility is paying a hefty 5.4% annual dividend yield right now. And in addition to being the most generous dividend-payer of the three stocks named today, it's also the cheapest stock, costing barely 11 times annual earnings per share.
On the downside, National Grid doesn't generate a whole lot of free cash flow. Trailing FCF at the utility is only $1.4 billion, versus a reported $3.7 billion in GAAP profits. Still, while an investor could wish the company generated a bit more cash from its business than is currently the case, the fact remains: Of the three stocks put forward by Wall Street so far today, this one is far and away the best buy option out there.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends National Grid and Zillow. The Motley Fool owns shares of Zillow.
