SanDisk Corporation (SNDK), Johnson & Johnson (JNJ), HollyFrontier Corp (HFC): Thursday’s Top Upgrades (and Downgrades)

The reason: As Motley Fool Blog network writer Sarfaraz Khan recently pointed out, a marked contraction in the difference in prices between West Texas Intermediate (WTI) crude oil and that of Brent is putting the squeeze on refiners like HollyFrontier Corp (NYSE:HFC). In years past, these refiners have been able to buy WTI crude oil at steep discounts, refine them into gasoline and diesel, and sell them at prices more approaching to what other refiners had to charge after refining pricier Brent crude oil.

Those days are coming to an end, and with them, the tailwind that’s been boosting HollyFrontier Corp (NYSE:HFC)’s profits. As a result, the P/E at Holly that today sits below 5.0 is expected to spike sharply upwards next year, giving the stock a forward P/E ratio of nearly 8.5. Indeed, already, we can see foreshadowing of this effect on the company’s cash flow statement, where free cash flow numbers for the past 12 months ($1.3 billion) are coming in about half-a-billion dollars below reported net income numbers ($1.8 billion).

Mind you, despite cutting its price target on HollyFrontier Corp (NYSE:HFC), Imperial Capital isn’t actually counseling selling. To the contrary, Imperial retains a buy rating on the stock, and the reason here is clear: Holly remains cheap, even if earnings falter a bit.

The stock costs only 6.5 times free cash flow today, and the company is sitting on $1.2 billion in net cash (reducing its valuation even further). If earnings aren’t going to grow much — or don’t grow at all — over the next few years, at least the stock is cheap enough to “price in” that risk. Meanwhile, we know that growth will return… eventually. At this point, investors may just want to sit back, cash their 2.8% dividend checks, and wait out the slump.

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

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson.

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