Monday's Top Upgrades (and Downgrades)

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 new buy ratings for large-caps Intel (NASDAQ: INTC  ) and Freeport-McMoRan (NYSE: FCX  ) . But the news isn't all good.

HomeAway has termites
Things were looking pretty good for HomeAway (NASDAQ: AWAY  ) investors as last week drew to a close. Analysts at investment bank Piper Jaffray had just upgraded the stock to overweight on expectations of improved pricing growth in 2014. But the enthusiasm was short-lived, as Monday dawns with a new rating for HomeAway: Sell.

The analyst you can thank for this downbeat assessment -- and the 7% drop in HomeAway's share price -- is Monness, Crespi & Hardt, which initiated coverage of HomeAway this morning with a sell rating and a $24 price target. But is it deserved?

It depends on how you look at it. On the one hand, yes, HomeAway's trailing P/E ratio of 135 does look a bit steep, even with 32% projected profits growth to back it up. On the other hand, though, the "GAAP" financials that go into the P/E equation don't really tell the whole story at HomeAway.

Last year, for example, this company reported earning less than $18 million GAAP profit. However, its actual cash profits -- its free cash flow -- amounted to a whopping $82.5 million. This gives HomeAway stock a price-to-free-cash-flow ratio of only 29, and on 32% projected growth, that seems cheap enough to me to make HomeAway deserving of a buy rating -- not a sell.

Freeport looks shiny
Happier news greeted investors in copper, gold, and oil explorer Freeport-McMoRan this morning. Here, we saw Brit banker Barclays resume coverage of the stock with an overweight rating and a $40 price target that promises significant upside to today's $31 share price.

And yet, there's something strange about this rating. The news out of Freeport today is that its Indonesian operations at the world's second-largest copper mine will be shut down for three months as the local government investigates accidents at the site. This hardly seems like good news for Freeport, and it could morph into even worse news if the government finds the company hasn't been taking due care of its workers at the mine, and levies fines as a result. Meanwhile, Freeport's stock price doesn't look all that attractive even as-is.

Freeport's P/E of 10 doesn't sound too bad, until you realize that earnings at the company appear close to peaking, and future annual earnings growth is expected to average only 3%. Meanwhile, free cash flow at the firm is anemic, with the firm generating only $212 million in real cash profits -- far short of the $2.9 billion in reported GAAP earnings. Indeed, valued on free cash, Freeport now boasts a P/FCF ratio of 140 -- higher even than the P/E ratio that scared Monness away from HomeAway.

Always end on a bright note
And finally, we come to Intel, subject of an upgrade to outperform from FBR Capital today. Although FBR acknowledges that Intel faces "headwinds" in its core personal computing market, the analyst nonetheless sees a bright future for the world's biggest semiconductor firm.

FBR is quoted on StreetInsider.com today, arguing that that Intel "has added more than enough new avenues of growth to replace lost PC units." In particular, FBR notes that "in our discussions with engineers intimately involved in the handset design process, they have unanimously expressed a renewed interest in Intel's mobile SoCs, owing to expected power and performance advancements in the upcoming Silvermont SoCs." 

Assuming FBR's right about the company's prospects, Intel's 12.6 P/E ratio looks like a cheap price to pay for consensus 11% growth, and a 3.7% dividend yield. Intel's also generating good free cash flow -- not quite as good as the profits that it's claiming on its income statement, granted, but still pretty good at about $10 billion a year.

To my Foolish eye, the stock looks undervalued, and priced to do exactly what FBR says it will: Outperform the market.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends HomeAway and Intel. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold, HomeAway, and Intel.

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