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 new buy ratings for both Facebook Inc (NASDAQ:FB) and Angie’s List (NASDAQ:ANGI). But it’s not all good news…
Pulling threads at Jos. A. Bank Clothiers Inc (NASDAQ:JOSB)
Let’s begin the day’s upgrades/downgrades march, therefore, with the odd-man-out stock: Jos. A. Bank Clothiers Inc (NASDAQ:JOSB), just downgraded by analysts at Avondale Partners to an underperform rating.
As you’ve probably heard by now, Jos. A. Bank Clothiers Inc (NASDAQ:JOSB) (“Joe” to its friends) reported fourth-quarter earnings earlier this week. The company missed Street revenue estimates, but beat on earnings with $1.01 in per-share profit, versus an expected $0.98. Problem was, while technically a “beat,” those $1.01 in earnings were still down 36% from last year’s fourth-quarter earnings of $1.58 — a pretty steep drop.
Joe’s also struggling to convert what GAAP earnings it does make into real cash profits. Over the course of last year, the company reported $80 million in GAAP earnings, but real free cash flow was a mere $49 million. Result: If you think Joe’s stock looks expensive today at 15 times “earnings,” and a 12% growth rate… wait until you get a load of its price-to-free cash flow ratio, which now stands at a lofty 24, or twice the stock’s growth rate.
Personally, I’ve long been a fan of Joe’s business, but the simple fact of the matter is that as a stock, Joe’s currently generating too little cash to justify its stock price. Avondale is right to recommend selling it.
Put Angie on your shopping list?
Continuing today’s theme of stocks with personalized names — and miserable free cash flow — we turn next to Angie’s List (NASDAQ:ANGI) List, recipient of a new “accumulate” rating (essentially a “buy”) from National Alliance Capital Markets this morning.
Using what I can only assume is a very accurate crystal ball, NACM puts a very precise target on Angie’s List stock, saying it will hit $21.37 12 months from now. If the analyst is right about that, it will result in a tidy 16% gain for investors buying at today’s prices.
Problem is, NACM is not right. Not even close.
Angie’s List, you see, generates no free cash flow whatsoever from its business. To the contrary, it burns cash with abandon, and always has. The stock’s also not profitable on a trailing basis, and its forward P/E, based on optimistic guesswork from analysts like NACM, has the stock trading for 97 times profits that it might — but very well might not — earn next year. So once again, what we’re looking at here is a stock selling for at least twice what it ought to be, based on today’s stock market price, and a stock very unlikely to rise further in the months to come. The only difference between Angie’s List and Jos. A. Bank Clothiers Inc (NASDAQ:JOSB)? For some reason, while Avondale has sense enough to tell you to sell the latter, NACM thinks you should go ahead and blow your money on the former.