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 headliners include Nike (NKE) and D.R. Horton (DHI), both of which are enjoying upgrades on the Street this morning. But would you care to Guess? (GES) which company isn't?
You Guess?ed right
Let's get the bad news out of the way first, and start off with Guess? The L.A.-based apparel designer popped more than 5% after reporting an "earnings beat" yesterday, and is up another couple of percent this morning. And yet, the stock was downgraded this morning by analysts at Caris & Co. (to "average").
Why? Perhaps it's because while Guess? beat estimates yesterday, the profits it reported were still down 40% from last year's third quarter -- quite a drop considering that revenues were only down 2%. What's more, looking forward, Guess? warned investors that the fourth quarter could see it earn as much as a dime less than the $0.95 per share that Wall Street has been looking for, and the company's likely to miss on revenues as well. Needless to say, full-year estimates are coming down. At the midpoint, Guess? now predicts it will earn about $2.10 for the year, or $0.07 short of the consensus number.
So it's time to sell Guess?, right? Well, maybe not. At less than 11 times earnings, the stock really doesn't look all that expensive based on a long-term growth rate expected to approach 10%. Add in Guess?' regular 3.3% dividend yield -- and the extra $1.20 a share management now says it will pay shareholders on Dec. 28 -- and its shares look at worst fairly priced, and probably a bit cheap. My Guess? It's still cheap enough to buy.
On Wall Street's flip side today, we find homebuilder D.R. Horton getting a lift from Compass Point. The analyst removed its sell rating on the stock this morning, upgrading to "neutral," and set an $18 price target on the stock. Good news?
Well, it's better than a downgrade, certainly. But it's still not a reason to buy the stock. Consider: At seven times earnings, D.R. Horton already costs more than its 5% projected growth rate would seem to justify. And for investors who prefer to focus on forward P/E ratios... that one's even worse. Based on next year's estimates, the company's carrying a forward P/E of 14!
Topping it all off, Compass Point's $18 price target is more than a buck below where the stock trades today, suggesting that even after the upgrade, this stock has nowhere to go but down.
Off to the races, or off with the laces?
And finally, we turn to Nike, recipient of an upgrade and a full-fledged overweight rating from HSBC Securities this morning. Bullish news out of Under Armour (UA) and Foot Locker (FL) earlier this month set CNBC's Jim Cramer to making bullish noises about Nike a few days ago, and now it seems the folks at HSBC agree.
This morning the British banker upped Nike to a $112 price target, suggesting a nice 12.5% profit awaits investors who buy the stock today. Don't believe it.
Generating subpar free cash flow, paying a miserly sub-1% dividend yield, and growing at a mere 8%, Nike is vastly overpriced at a P/E ratio of nearly 22. While it's a terrific brand and a terrific company, there's simply no chance that investors will make money by buying this stock at today's prices.
My response to HSBC's buy recommendation? Just don't do it.
Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike and Under Armour. Motley Fool newsletter services recommend Guess?, Nike, and Under Armour.