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 top trio of newsmakers includes newly downgraded Angie's List (ANGI), now-upgraded Pandora (P), and for American Apparel (APP) we have a "speculative buy." Let's try them on for size.
Scratch Angie off your list
Another day, another new rating for Angie's List. Yesterday it was up, but today it's down. Responding to the buy rating Oppenheimer hung on the stock yesterday, this morning an analyst at competing research house Canaccord Genuity decided to downgrade the stock to neutral. Even worse, the analyst cut its price target on the stock by nearly 40% -- to $12.50.
But wait a moment. Isn't $12.50 more than what Angie's shares cost today? (Yes.) So shouldn't Canaccord still be recommending the stock, albeit with a more realistic target?
Not necessarily. You see, Canaccord expects Angie's List to spend more on advertising, and for a longer period of time, than previously believed, before switching into profits-earning mode. The analyst says profits that were expected to arrive in 2014 may now not happen before 2015. Given this, there's a real risk that investors (who invest in companies to earn a profit, after all) will lose patience with the delay, and dump the stock in search of something with more potential. No one could blame them if they did.
Pandora opens the box
Speaking of profitless wonders: Pandora. The online music player reported earnings yesterday. More accurately, it reported "losses." Still, the announcement of 51% revenue growth, combined with bullish noises on future growth, have rekindled optimism about the stock on Wall Street.
So far, at least two analysts (Canaccord and SunTrust) have upgraded the stock to buy, while several more are doubling down on their already bullish prognostications. Yet for all the growth in revenue, Pandora's still losing money, and still burning cash like mad.
Buying into a money-loser may not make much sense to value investors, but for the mo-mo crowd, momentum has its own logic. With the shares up 23% (and counting), the bulls control the day.
As for tomorrow... time will tell. But until Pandora finds some profits in its box, conservative investors are best advised to leave this one alone.
Last but not least, we come to homegrown clothing maker American Apparel, a stock that just scored a "speculative" buy, according to Briefing.com.
Sounding awfully bemused at why he's doing so, Standpoint Research analyst Ronnie Moas admits that "I do not remember ever recommending a name trading at $1/sh with a market cap below $150M but I am doing so at this time." Why? Because "year-to-date the shares have shown signs of life and comp store sales have been rising by double digits for 15 consecutive months."
Indeed, American just reported that its comparable-store sales were up a whopping 24% year over year in August. (And August ain't even over yet!) Even if that's slower growth than the 41% long-term earnings growth posited for the company on Wall Street, that's nothing to sneeze at. And yet, even as apparel flies off the shelves at American, one thing's notably absent from these stores: profits.
And another: cash.
After losing money for three straight years, American Apparel currently boasts a balance sheet burdened with $175 million in debt, versus less than $8 million cash. With no free cash flow, the company's unlikely to make a dent in that balance sheet, suggesting debt will remain a persistent problem for some time to come. Meanwhile, the hot-today, not-tomorrow nature of the fashion industry suggests the good times its sales are enjoying may not last.
In short, what we have here is a tale of long-term risk with short-term promise. If you want to make a profit on this one, you're best advised to act fast... and exit quickly.
Fool contributor Rich Smith holds no position in any company mentioned.
- American Apparel