General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT): Thursday’s Top Upgrades, and Downgrades

Take Deckers Outdoor Corp (NASDAQ:DECK) for instance. Priced at 17 times earnings, the stock already looks expensive relative to consensus forecasts for 9% long-term earnings growth. In fact, though, Deckers’ cash flow statement shows that the company’s only generating about $0.79 in real cash profits (FCF) for every dollar it claims to be earning under GAAP. This means that a stock that that already looks pretty expensive under its GAAP valuation is actually about 25% more expensive than that, when valued on free cash flow. To me, it’s reason to go a step beyond a hold rating, and downgrade Deckers all the way to sell.

Speaking of going beyond, Standpoint also cut its rating on Bed Bath & Beyond Inc. (NASDAQ:BBBY) this morning. And while the situation here isn’t as bleak as what we see at Deckers, the valuation still looks bad.

Bed, Bath, you see, costs less than Deckers — only 15 times earnings versus 17 times earnings at the Uggs-maker. It’s also growing faster than Deckers — with a 13% growth rate projected for it. At best, though, this suggests slight overvaluation risk in the shares.

Now here’s where things get worse: Just like Deckers Outdoor Corp (NASDAQ:DECK), Bed, Bath is a weak cash producer, generating only about $0.85 in free cash flow for every $1 it reports as net income. To my Foolish eye, that’s enough to take Bed, Bath’s valuation up a notch from slightly overvalued to pretty darn overvalued. While not as expensive as some other retail stocks I could name (I’m looking at you, lulu), the stock’s pretty far from buy territory, and even Standpoint’s grudging hold rating looks tenuous to me.

Here again, I think discretion is the better part of value: Absent a total absence of better stock ideas out there, I’d go ahead and sell Bed, Bath right now, rather than risk taking a bath on an overpriced stock.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond (NASDAQ:BBBY). The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Northrop Grumman.

The article Thursday’s Top Upgrades (and Downgrades) originally appeared on Fool.com is written by Rich Smith.

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