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 upgrades for both Intel (INTC 0.04%) and United Natural Foods (UNFI -0.77%). But the news isn't all good, so before we get to those two, let's take a quick look at why today is...
Not so glittery for Eldorado Gold
Shares of Eldorado Gold (EGO 0.07%) are sitting out a rally elsewhere on the markets today, sidelined -- most likely -- by a downgrade to "sector perform" by the analysts at RBC Capital. Which is strange, because if you actually look at the note, RBC is saying that despite its downgrading the stock, it still think Eldorado is worth $9 a share -- or nearly 22% above where the stock trades today!
So what's up with this downgrade? Here's the deal: Shares of Eldorado are down more than 40% over the past year. This suggests that if sentiment rises in the gold-mining sector, the shares might recover some of their losses.
But they also might not. You see, even with analysts like RBC optimistic about the company's prospects (on average, analysts think Eldorado will grow its earnings at 20% per year over the next five years), the stock's near-29 price-to-earnings ratio suggests it's already fully valued for that growth rate. Meanwhile, elsewhere in the gold-mining sector, better bargains abound, which could detract from Eldorado's ability to outperform the group. Goldminer Newmont, for example, costs only 10 times earnings, is projected to grow at 12% -- and with a dividend yield of 4.2%, is paying its shareholders more than twice the cash that Eldorado does.
All of which suggests that RBC is right to downgrade Eldorado.
An Intel-igent buy?
In happier news, Intel shares got a boost this morning when analysts at Topeka Capital upped their rating to "buy" with a $28 price target. Intel just announced that it's buying Finland's Stonesoft Oyj, a cybersecurity provider, for its McAfee division at a purchase price of about $389 million.
Investors seem to like the idea, despite the price -- or perhaps they just like Intel stock, because of its price. Valued at just 12 times earnings today, growing at 11%, and paying a hefty 3.8% dividend yield, Intel shares look cheap -- and they are.
In addition to an obviously undervalued stock price, Intel boasts the twin goods of plenty of cash in the bank (nearly $4 billion more cash than debt) and strong free cash flow, which backs up about 97% of reported GAAP earnings. The stock's more than just fairly priced today. It's objectively undervalued, and Topeka is right to recommend it.
Eat healthy, invest healthy?
Sadly, Wall Street's winning streak of good advice for investors ends with its next call -- a recommendation from UBS to buy shares of United Natural Foods.
As StreetInsider.com tells it, UBS sees a disconnect between opinion and fact at the organic foods distributor, which is giving investors a chance to buy the stock at a discount. "UNFI is benefiting from strong industry dynamics in the near and long term," writes the analyst, because "demand has accelerated after a slow start to the year." Yet UBS thinks the stock's valuation of 25 times earnings is too low, and implies that investors have little faith that the trend toward organic shopping will continue.
Me, I think investors just have no faith that the stock is cheap enough to buy. Consider: 25 times earnings is already a pretty rich price to pay for a company that pays no dividend, and that most analysts think will grow at only 15% per year over the next five years. Adding to the bear case against United Natural, the company generated less than $37 million in real free cash flow over the past year -- despite reporting GAAP earnings of more than $98 million. This means that for every $1 United Natural claimed to have "earned" last year, the company really only generated about $0.38 in real cash profits...
...and it means that a stock that looks expensive at 25 times earnings looks even more overpriced at more than 66 times free cash flow. Long story short, UBS is wrong to be recommending that investors bottom-fish at United Natural. Buying this health-foods stock could be hazardous to your wealth.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel.
