Friday's Top Upgrades (and Downgrades)

Motley Fool

Buy this, sell that, aggressively accumulate the other -- every day the upgrades, downgrades, new ratings, and price tweaks issued by Wall Street come fast and furious, and judging from the shifts in stock price that follow each, a lot of investors closely follow what the Street has to say about their stocks.

But should they?

This new series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today we begin with three high-profile ratings moves making the rounds on Wall Street this morning: a new buy rating for VMware (NYSE: VMW - News), a downgrade for E-Commerce China Dangdang (NYSE: DANG - News), but two (count 'em, two!) new and improved price targets for Coinstar (Nasdaq: CSTR - News). Let's dive right in.

Playing peekaboo!
Let's start with virtual storage specialist VMware, which caught a bit of bad press yesterday when CFO Mark Peek jumped ship to join cloud-computing venture Workday. In what one can only assume was a bit of an ego-bruise, VMware actually rose on the news yesterday. And this morning, analyst Piper Jaffray decided to rub salt in the wound by following up on the news with a new outperform rating on VMware.

Peek or no Peek, Piper thinks this $110 stock has the potential to hit $125 within a year -- a tidy 14% gain. The prediction looks a bit optimistic considering that VMware is already selling for 66 times earnings. On the other hand, VMware is a pretty strong cash generator, generating roughly two-and-a-half times as much cash in a year as it actually reports as net earnings on its income statement. As such, VMware shares might not be quite as expensive as meets the eye.

Still, if the thought of investing in a company whose P/E is measured in the dozens scares you, you can always buy VMware parent company EMC (NYSE: EMC - News) instead. With a P/E of 26, it's not as scarily priced as its subsidiary. Plus EMC is cash-rich and free-cash-flow-strong -- just like its prize possession.

Dang! Another downgrade!
If only we could say the same for our second featured stock, E-Commerce China Dangdang -- or as its fans like to call it, the "Amazon.com of China." Dangdang shares are suffering after getting hit by a downgrade to "neutral" from Credit Suisse. Worse, they probably deserve it.

Unlike the American success story to which it's so often compared, Dangdang is not currently profitable. It's burning cash, too, and whereas Amazon has basically kept pace with the market over the past year, Dangdang shares are down nearly than 50%. Sure, on the plus side Dangdang's $10 stock costs a mere fraction of what a share of Amazon will run you. On the other hand... you get what you pay for.

Coinstar rings the register
In happier news, another company that aspires to be someone else -- Redbox operator Coinstar, which recently teamed up with Verizon to take on Netflix in the video-streaming market -- is getting lauded on Wall Street by a duo of Wall Street worthies. The company just reported strong first-quarter earnings and upped its outlook for the full fiscal year, winning an immediate round of applause from the Street.

In the near term, Benchmark believes Coinstar's improved pricing and "lower workaround costs" could earn it as much as $4.60 this year, then grow that 13% next year to $5.20 per share. This has the analyst upping its price target to $85 a share and doubling down on its buy rating. Meanwhile, more conservative Compass Point is standing pat at "neutral" (perhaps a wise decision, considering that Coinstar has already spiked 9% in response to yesterday's news). Calling future growth prospects "challenging," the most Compass is willing to pay for Coinstar is $70. That said, the analyst admits: "As one of the last standing DVD-rental businesses that also claims the low-cost price point ... we acknowledge that near-term financial performance can continue."

And isn't that always the way? The immediate prospects for Coinstar look bright, but like Jim Morrison once said, "the future's uncertain and the end is always near." Now that Coinstar sports a P/E ratio higher than its own growth rate, it won't take much of a slip-up to send the shares tumbling once again. Caveat investor.

Motley Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. The Motley Fool owns shares of EMC. Motley Fool newsletter services have recommended buying shares of VMware and Netflix.

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