Alcoa Inc (AA), Overstock.com, Inc. (OSTK), Chipotle Mexican Grill, Inc. (CMG): Wednesday’s Top Upgrades (and Downgrades)

Why? Consider: At 33 times earnings today, Alcoa Inc (NYSE:AA) clearly costs too much for the 6.5% long-term profits growth it’s expected to produce. And just as was the case with Chipotle, even stronger-than-earnings free cash flow ($437 million) isn’t strong enough to save the valuation case here. Based on trailing free cash flow, and even assuming this number doesn’t deteriorate, I see the stock trading for nearly 19 times FCF — too high for a 6.5% grower. Factor in Alcoa’s mammoth debt load — nearly $7.4 billion net of cash — and the enterprise value-to-free cash flow on this behemoth looks even worse.

Long story short, in contrast to JPMorgan, which only sees Alcoa as less attractive than it once thought the stock to be, I think the stock’s downright ugly. Its valuation shows no room for upside, and I’d expect it to fall.

Stock up on Overstock?
And finally, thankfully, we get to end on a “bright” note today, with Merrill Lynch’s downgrade of Overstock.com, Inc. (NASDAQ:OSTK). If that sounds strange, though, it’s not really. Here’s why:

According to Merrill, Overstock.com, Inc. (NASDAQ:OSTK) is showing weak and inconsistent customer growth. At 33 times earnings (about the same valuation as Alcoa), the banker sees Overstock.com, Inc. (NASDAQ:OSTK) shares as overvalued, and bound to “underperform.” But Merrill Lynch is wrong.

Priced at 33 times earnings, Overstock.com, Inc. (NASDAQ:OSTK) shares do look expensive, I’ll admit. But that “P/E” ratio doesn’t take into account the fact that Overstock.com, Inc. (NASDAQ:OSTK) generates significantly more real cash profit (free cash flow) than it reports as GAAP net income. Indeed, FCF for the past 12 months came to $32.3 million, or 65% more than GAAP income. As a result, the stock that appears to sell for “33 times earnings” can just as easily be said to cost only 20 times free cash flow. And when you consider that most analysts who follow Overstock see it growing earnings at 34% per year over the next five years, 20 times FCF hardly seems too high a price to pay for such barn-burning growth.

Now… could that growth rate fail to appear in the future? Sure it could. Merrill Lynch itself notes that growth at the firm seems “inconsistent.” But based on the numbers we see today, and the estimates analysts are on record supporting, the stock still looks cheap today.

Result: Despite more than quadrupling in share price over the past year, Overstock.com could still run higher.

The article Wednesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill (NYSE:CMG). The Motley Fool owns shares of Chipotle Mexican Grill.