3 Notable Upgrades on Wednesday

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On a day-to-day basis, there are countless analyst calls – some of which are good and others that are bad – and in this piece, I am looking at three in particular to determine if any are good and present value for investors.

A “responsible” call of caution

Since June 12, shares of Myriad Genetics (NASDAQ: MYGN) have traded lower by more than 20%. This loss has come after the Supreme Court ruled to limit gene patents, which obviously hurts a genetic testing company such as Myriad.

However, on Wednesday, Oppenheimer took a bullish stand, initiating coverage with a “Perform” rating. As a result, shares moved higher by 2.23% -- but investors should take note that Oppenheimer is only predicting upside of 10% from its closing price on Wednesday.

Overall, I think Oppenheimer’s call was responsible; not good or bad. While many have speculated, we don’t know what affect the Supreme Court ruling will have on Myriad moving forward. With Myriad unable to obtain patents on genes BRCA1 and BRCA2, it leaves the company vulnerable to a number of risks.

Quest Diagnostics has already said that it plans to offer BRCA1 and BRCA2 gene testing (to predict cancer) to physicians and hospitals later this year. Then, aside from competition, there are pricing concerns, and a belief that Myriad will have to drastically lower the price of its tests to compete with new competitors.

With that said, expectations are rock bottom, due to these risks, making Myriad a very risky investment; but also interesting if the company can weather this storm. Overall, a “Perform” rating is what it deserves.

Ignoring the obvious concerns with this “bad” call

Workday (NYSE: WDAY) shares rose 2.64% on Wednesday behind an initiation of coverage by William Blair; an Outperform rating. The firm is particularly bullish about the company’s new cloud recruiting product and believes that Workday’s new services are performing better than competitors Taleo and SuccessFactors’ products.

Workday might very well have great growth prospects, with object-oriented technology, and a data model that learns about its customers. However, with the stock trading at 35 times sales, it better have something even more transcendent in the works.

To me, I simply don’t understand this bullish rating. At what point does a company such as this have all upside priced into its stock? Personally, I just can’t find the upside in a stock trading at such a lofty valuation with an operating margin of negative 38%. Thus, I think this is a bad call, one that blindly ignores the company’s decelerating growth, its valuation, and its lack of efficiency.

Re-evaluation & logic creates the call of the day

More than anything, I love to see an analyst re-evaluate a stock that he/she downgraded and then change their outlook based on price and macro conditions. When it’s all said and done, this behavior is what analysts should always exhibit; not the “follow-the-leader” calls that we often see on Wall Street.

On Wednesday, we saw such a call by Wells Fargo analyst Gray Powell, when he upgraded Rackspace (NYSE: RAX) to “Outperform.” Yet, less than three months ago, this same analyst downgraded the stock when it was trading near $50.

Now, at $38 ($36 prior to the upgrade), Powell believes that fears of new cloud infrastructure services (i.e. Windows Azure) on Rackspace’s hosting ops are a bit unwarranted. Powell said that many companies are electing to use standardized platforms – those from Rackspace – because they are common and easily accessible.

The reason that I like this call is because when Powell downgraded the stock he too was worried about new platforms, but now after having time to assess the market, he sees that Rackspace products are still very much in demand. However, the stock has lost a great deal of value over the last few months. Thus, I believe it makes the stock a “buy,” and that Powell will once more call the stock correctly.

Final thoughts

Back in May I wrote an article entitled “The Good, Bad, & Ugly of Analyst Upgrades,” which showed that only certain types of analyst calls should be taken seriously. Powell’s Rackspace call is the quintessential example of a good call, while calls on Myriad and Workday are a bit more questionable. With that said, I do agree with Powell, and believe that Rackspace is presenting upside. Yet, for the reasons noted, I wouldn’t follow William Blair with their Workday rating. 

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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