This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on.
Today, we'll be looking at a pair of stocks you've probably never heard about but that Wall Street thinks are worth considering. But first, a word about Apple (AAPL 4.86%). Shares of the iEverything powerhouse are defying a downturn on the Dow this morning and outpacing the Nasdaq's weak rise, gaining more than 1% in early trading despite receiving a price target cut on the Street. This morning, analysts at Needham & Co. trimmed their price target for Apple by $5, predicting the stock will rise to only $590 by the end of this year.
That sounds like bad news. But with Apple shares costing a bit less than $527 today, Needham's prediction still promises the prospect of an 11.9% gain. Combined with Apple's 2.3% dividend yield, that makes for a respectable return of more than 14%. But can Apple achieve it?
I think it can.
Priced just more than 13 times earnings today, Apple shares are actually a bit cheaper than they look. At last report, the company had about $40.8 billion in the bank and an additional $118.1 billion in long-term investments. Subtract $17 billion in long-term debt, and that still works out to nearly $159 billion in net cash -- giving the stock an enterprise value of just $410 billion -- roughly 11 times its $37 billion in trailing profits.
Simple PEG analysis tells you that Apple only needs to achieve 10% annual growth or so to make today's price a fair price to pay for Apple. In fact, most analysts agree that Apple is likely to grow profits at closer to 20% over the next five years. In short, the stock's cheap -- and maybe an even bigger bargain than Needham gives it credit for.
Apple of their "eye"
What could be better than Apple? If you ask the analysts at Wells Fargo, they think they see a lot of potential in a little Internet security company you've probably never heard of before: FireEye (MNDT).
A specialist in "real-time protection" of Internet networks for companies and government, FireEye focuses on keeping malware out of machines. Wells Fargo explains the company's services this way: "Traditional network and signature based technology simply fails to detect new advanced malware and threats that often arrive from multiple vectors (email, files, and websites) without any known signature. ... FEYE's virtual machine technology and cloud subscription service enable enterprises to detect these new and unknown threats and stands to significantly disrupt legacy solutions."
According to StreetInsider.com, Wells Fargo is looking for FireEye to collect $410 million in revenues this year, then keep growing that total 45% annually for the next five years. (Analysts on Yahoo! Finance are even more optimistic, projecting a 55% annualized growth rate.) Accordingly, Wells thinks you should buy the stock.
The problem, of course, is that with high expectations come even higher valuations. The stock sells for 76 times last year's revenues -- let alone profits, of which it has none -- and costs 25 times the revenues that Wells expects it to produce this year. Analysts don't expect the company to book an actual GAAP profit before 2017 -- and perhaps not even then.
Long story short, this looks like a "story stock" to me -- not an actual, profit-earning business. Yes, FireEye may have a disruptive technology. Maybe it's even got better tech than anyone else. But in the fast-moving tech sector, do you want to risk your money on a bet that no one else will come up with better tech at any time in the next four years, and disrupt FireEye itself, before the company starts earning profits?
Fuel for your portfolio?
Finally, we'll end with another stock you've never heard of that Wall Street thinks you should: artificial intelligence-driven digital advertiser Rocket Fuel (NASDAQ: FUEL). Goldman Sachs is the banker plugging this company today, initiating coverage and assigning the stock a buy rating.
According to Goldman, "the acceleration of programmatic buying [is] one of the more significant undercurrents shaping the online advertising landscape in 2014... Rocket Fuel, with its 'artificial intelligence' technology, is helping to enable this shift." The analyst expects rapid growth in the company's penetration of the advertising market to fuel "upward estimate revisions" by its brother analysts, sending Rocket Fuel shares soaring higher and higher, and ultimately ending the year at a share price of $69.
But here again, we encounter a case of high expectations begetting high valuations. While not as crazy overpriced at FireEye, Rocket Fuel shares are certainly not cheap at a valuation of nine times sales (and no profits, natch). Free cash flow, too, is nonexistent at the company, leaving investors with nothing more than hopes of growing sales, and hopes for further growth, to support this stock's price.
The risk: One stumble in the sales growth story, and Rocket Fuel could come tumbling back to earth.