Wednesday's Top Upgrades (and Downgrades)

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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're watching as analysts continue to sign up for Sprint Nextel (S), but pull the plug on Cisco (CSCO). Meanwhile, Goldman Sachs (GS) just got a big bump in price target...

Goldman is golden
Let's start with that last one. Yesterday, investment banker Goldman Sachs confirmed that in Q3 of 2012, it brought in $8.35 billion in revenues -- a cool billion more than anyone on Wall Street was expecting. Profits were pretty nice, too -- $2.85 per share, or $0.73 ahead of consensus.

This morning, the Goldman got its reward when banking analyst FBR Capital upped its price target on the shares -- which FBR had already rated an "outperform" -- by $15, to $145 apiece.

That sounds like a pretty aggressive goal, but in fact it might turn out to be conservative. Goldman Sachs currently sells for a P/E ratio of 18.5, you see. That's already a smaller multiple to earnings than you'd expect to see at a bank that most analysts agree is likely to grow its earnings 20% per year over the next five years. It's even cheaper when you notice that Goldman is paying its shareholders a 1.5% dividend, and just announced it will hike this dividend to $2 annually, effectively a 1.6% dividend yield.

In short, $145 is about what it will take to make Goldman shares "fairly priced." And as the shares work their way toward that target, shareholders can look forward to a tidy 17% profit ... plus the dividend.

Cisco sags
We should all be so lucky. Unfortunately, not all of us will -- as evidenced by Cantor Fitzgerald's recent downgrade of Cisco Systems. This morning, the analyst shaved $1 off its price target (now $19.50) and downgraded to hold on worries that Cisco's "recovery thesis" may take "another one to two quarters" to materialize.

Yesterday's weak earnings reports out of peer tech companies IBM (IBM) and Intel (INTC) suggest Cantor may be right about a delay in the tech rebound. But even so, I'm not so sure investors would be right to worry about buying Cisco today.

Priced at 12.5 times earnings, the shares really don't look that expensive for this 8% grower with the 3% dividend -- especially not once you net out Cisco's $32.4 billion in net cash. This cash makes up nearly one-third of Cisco's market cap, so once you net it out, what you're really looking at here is a business that costs about 8.4 times what it earns in a year.

Suffice it to say that's a very cheap price to pay for one of the world's best tech companies. Add in the 3% dividend, and there's really no reason not to own Cisco today, and cash dividend checks from now until whenever the recovery decides to roll around.

And the last shall be ... last
Last and least -- and with apologies for ending on a down note -- we come to the stock that's been grabbing headlines all week long: Sprint Nextel.

As you've probably heard by now, Japan's Softbank is spending $20 billion to acquire a 70% stake in Sprint and basically buy itself an entrée into the U.S. telecom market. Yesterday, Softbank's overture won Sprint an upgrade to neutral from RW Baird. Today, analysts at Argus went one step further and actually recommended buying Sprint, saying the stock is likely to rise to $7.50 a share over the course of the next year.

Unfortunately, Argus is wrong about that. Sprint's not worth $7.50. It's probably not even worth the five bucks and change its shares cost today.

While Softbank's support may help mitigate the risk of Sprint going bankrupt, the fact remains that this company hasn't been able to earn a GAAP profit in more than half a decade. And while Sprint is indeed cash-profitable, its stock costs 41 times the amount of cash it makes in a year. Given a choice between buying Sprint at 41 times free cash and, say, AT&T at 13 times, which would you choose?

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Intel. Motley Fool newsletter services recommend Goldman Sachs and Intel.

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