Tuesday’s Top Upgrades (and Downgrades): American Apparel Inc. (APP) and More

Page 1 of 2

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 include upgrades for clothiers American Apparel Inc. (NYSEMKT:APP) and Lululemon Athletica inc. (NASDAQ:LULU). But it’s not all good news, so let’s start the day off with a look at why…

Lululemon Athletica inc. (NASDAQ:LULU)Archer misfires
Tuesday opened on a bleak note for shareholders of Archer Daniels Midland Company (NYSE:ADM) when Canadian broker BMO Capital Markets announced it was pulling the stock’s outperform rating and downgrading it to “market perform.”

Why the downgrade? At $31.58 a share, and 15.2 times earnings, ADM doesn’t look egregiously expensive. Indeed, with a 2.4% dividend yield and a 10% projected growth rate, the stock looks close to fairly priced… maybe just a wee bit pricey.

Problem is, $32 a share happens to be exactly the price target BMO had on the stock when it was recommending the stock as cheap. Now that the stock’s approaching its target price, therefore, BMO sees most of the potential profits as having already been reaped — and I agree.

ADM is already trading a bit ahead of where its dividend yield and earnings growth rate suggest it “should” be trading. What’s more, the quality of ADM’s earnings are a bit suspect. Free cash flow at the firm currently backs up less than $0.80 on every $1 worth of “profits” the firm says it’s earning. Add in a debt load that exceeds cash-in-the-bank by about $7.2 billion, and I’d say there’s considerably more risk left in this stock than reward. A downgrade seems appropriate here.

Time to “buy American”?
Better news greeted American Apparel Inc. (NYSEMKT:APP) shareholders this morning, as Brean Capital stepped up to support the domestic clothing manufacturer with a buy rating, a $2 price target, and the assertion that this brand is simply “unsinkable.”

According to the analyst, AA boasts “a fiercely loyal following” for its “unique and enduring brand.” Financially speaking, the firm is producing “strong top- and bottom-line results, with January 2013 same store sales of +10% marking the 20th consecutive month of YoY increases.”

One thing AA has failed to produce, though, is profits. American Apparel lost $53.3 million over the course of the past 12 months, alongside negative free cash flow of $4.2 million. Debt at the company is a massive $180 million, against just $7 million cash. While Brean seems convinced that the company has turned the corner, and will produce “material operating gains in 2013 and beyond,” the jury’s still out — and even if the company does succeed in producing an operating profit, it’s going to be hard to achieve actual net profitability with that debt load dragging it down. For now, the stock remains a gamble — high potential reward, but with high risk attached.

When all you’ve got is lululemons, make… profit
Apparently, though, Wall Street analysts have no problem with taking on a bit of risk — or recommending you to — in their recommendations today. Case in point: Even as Brean was recommending investors patriotically pile into American Apparel, Cowen & Co. was tapping another clothier for an outperform rating of its own: yoga-ware manufacturer lululemon athletica.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!