Apple Inc. (AAPL), QUALCOMM, Inc. (QCOM): 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, our headlines feature a pair of cuts to price targets at QUALCOMM, Inc. (NASDAQ:QCOM) and Apple Inc. (NASDAQ:AAPL). But the news isn’t all bad, so before we address those two, let’s start on a positive note.

Apple Inc. (NASDAQ:AAPL)

Cliffs Natural Resources Inc (NYSE:CLF) could climb

That has got to hurt. No sooner did Cliffs Natural Resources Inc (NYSE:CLF) CEO announce he’s planning to retire yesterday, than out came an analyst and recommended buying the stock.

Musing that Joseph Carrabba’s exit from the company opens up new directions in which the company could go (spinoffs, going private), one thing BB&T thinks will not happen is a dilutive stock offering — and just removing that risk from the table may allay some investor concerns. Additionally, BB&T notes that iron ore prices appear to be ready to improve in 2014 — which clearly would be a good thing for a company like Cliffs, which sells the stuff.

None of which makes for a good reason to buy Cliffs Natural Resources, however.

Unprofitable today, and priced at close to 10 times the profits that it might earn next year (and might not), Cliffs shares look dangerously overpriced to me. Yes, even though they’ve fallen 64% over the past year, I think there’s still room to the downside. Free cash flow at the company is nonexistent. To the contrary, Cliffs burned through nearly half a billion dollars over the past 12 months, adding to the burden on a balance sheet that’s already $3.4 billion in hock (net of cash).

Long story short, Cliffs’ hole remains deep. It’s going to take more than a departing CEO to piggyback a “buy” thesis on this one.

Now for the actual good news

In contrast, I’m quite a bit more optimistic about a pair of companies that just got their price targets cut at Canaccord Genuity. This morning, Canaccord announced it was reducing price targets on both QUALCOMM, Inc. (NASDAQ:QCOM) and Apple Inc. (NASDAQ:AAPL) — to $84 and $530, respectively. And yet, considering how low both stocks have sunk already, what this really works out to is the potential for Apple to gain 25%, and Qualcomm… 40%!

Needless to say, at the same time as it is ratcheting back its price expectations slightly, Canaccord still recommends “buying” both stocks. Let’s take them one at a time, and see what that’s still really good advice.

QUALCOMM, Inc. (NASDAQ:QCOM)

Priced under 17 times earnings, expected to grow these earnings at 18% per year over the next five years, and paying a 2.3% dividend yield, QUALCOMM, Inc. (NASDAQ:QCOM) looks like a great buy at first glance. A second glance suggests it’s not quite as good a deal as it seems initially. But it’s still plenty cheap.

Over the past 12 months, QUALCOMM, Inc. (NASDAQ:QCOM) generated $5.4 billion in positive free cash flow. That’s about 14% less than it reported for net income. However, Qualcomm’s balance sheet shows that it’s sitting on about $13.5 billion in cash — so if the company’s earnings aren’t quite as robust as they seem, neither is its market cap.

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