Friday's Top Upgrades (and Downgrades)

Motley Fool

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 both Facebook (FB) and Angie's List (ANGI). But it's not all good news...

Pulling threads at Jos. A. Bank
Let's begin the day's upgrades/downgrades march, therefore, with the odd-man-out stock: Jos. A. Bank (JOSB), just downgraded by analysts at Avondale Partners to an underperform rating.

As you've probably heard by now, Jos. A. Bank ("Joe" to its friends) reported fourth-quarter earnings earlier this week. The company missed Street revenue estimates, but beat on earnings with $1.01 in per-share profit, versus an expected $0.98. Problem was, while technically a "beat," those $1.01 in earnings were still down 36% from last year's fourth-quarter earnings of $1.58 -- a pretty steep drop.

Joe's also struggling to convert what GAAP earnings it does make into real cash profits. Over the course of last year, the company reported $80 million in GAAP earnings, but real free cash flow was a mere $49 million. Result: If you think Joe's stock looks expensive today at 15 times "earnings," and a 12% growth rate... wait until you get a load of its price-to-free cash flow ratio, which now stands at a lofty 24, or twice the stock's growth rate.

Personally, I've long been a fan of Joe's business, but the simple fact of the matter is that as a stock, Joe's currently generating too little cash to justify its stock price. Avondale is right to recommend selling it.

Put Angie on your shopping list?
Continuing today's theme of stocks with personalized names -- and miserable free cash flow -- we turn next to Angie's List, recipient of a new "accumulate" rating (essentially a "buy") from National Alliance Capital Markets this morning.

Using what I can only assume is a very accurate crystal ball, NACM puts a very precise target on Angie's List stock, saying it will hit $21.37 12 months from now. If the analyst is right about that, it will result in a tidy 16% gain for investors buying at today's prices.

Problem is, NACM is not right. Not even close.

Angie's List, you see, generates no free cash flow whatsoever from its business. To the contrary, it burns cash with abandon, and always has. The stock's also not profitable on a trailing basis, and its forward P/E, based on optimistic guesswork from analysts like NACM, has the stock trading for 97 times profits that it might -- but very well might not -- earn next year. So once again, what we're looking at here is a stock selling for at least twice what it ought to be, based on today's stock market price, and a stock very unlikely to rise further in the months to come. The only difference between Angie's List and Jos. A. Bank? For some reason, while Avondale has sense enough to tell you to sell the latter, NACM thinks you should go ahead and blow your money on the former.

My advice: Ignore their advice.

Time to friend Facebook? 
Finally, we turn to what's probably the most famous stock on today's list: Facebook, which today scored an upgrade to "buy" from Argus Research, and an initiation at "strong buy" from Oracle Investment Research.

According to StreetInsider.com, Oracle particularly likes the new "Facebook Home" feature being rolled out on HTC phones. Likes it so much, apparently, that Oracle's willing to slap a $38 price tag on this stock, which currently costs only $27, and to promise investors a near 40% profit if they'll just buy Facebook shares today.

Bunk.

Priced at a simply astounding 1,800 times earnings today, Facebook is, on its face, too expensive for any sane investor to want to buy. Granted, there are quibbles with that valuation. Free cash flow at the firm, for example, is much stronger than reported GAAP income. So much so that valued on free cash, Facebook stock actually only costs about 170 times FCF.

But honestly, that's neither here nor there. Call Facebook a "170 P/FCF stock" or call it a "1,800 P/E stock" -- either way, the valuation on this one is far too great for Facebook's projected 29% profits growth rate to justify. While it's a fine business and an invaluable service, there's just no way this stock can pay off as an investment.

My advice: "Friend" this stock at your peril.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. link

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