Wednesday’s Top Upgrades (and Downgrades): WellPoint, Inc. (WLP) and Fossil, Inc. (FOSL)

And rightly so. With $343 million in annual profit for 2012, Fossil shares now sell for just under 19 times earnings. That’s a bit more than investors should ordinarily want to pay for the 18% annual growth Fossil is expected to produce over the next five years. And while it’s certainly possible that Fossil generated enough free cash flow to make up the difference last year, and transform a slightly overpriced-looking stock into a bargain… I’m not optimistic. At last report, remember, free cash was lagging reported net income rather badly.

Long story short — I’m willing to suspend judgment on Fossil for the time being, seeing as the company hasn’t yet produced a 10-K filing, or included its cash flow numbers in yesterday’s earnings report. There could be good news in there, and we’ll want to wait to see what the news is before rendering a final verdict on the company’s performance. Then again, if the cash flow news was good enough to make a difference, don’t you think they would have told us about it already?

Street questions WellPoint’s prognosis
Finally, we come to WellPoint, downgraded today to “neutral” by analysts at Monness, Crespi, Hardt. This ratings shift is a strange one, seeing as the news at WellPoint this week has generally been of the positive variety. StreetInsider.com tells us that the company reaffirmed its guidance for fiscal 2013 yesterday — $7.60 in per share profit. Also yesterday, WellPoint announced that it’s picked a 20-year veteran of the health care industry — Joseph Swedish — to become its new CEO.

Monness may not be impressed, but to my Foolish eye these look like positive developments. And with WellPoint shares currently costing less than eight times earnings — but projected to grow earnings at 12% per year over the next five years, and paying a 1.7% dividend — the stock looks cheap to me. While I’d much prefer to see WellPoint generating better free cash flow than it currently does (only $2.2 billion or just 83% of reported net income), the number’s still high enough to make WellPoint a buy.

In my opinion, at least. Just not in Monness’.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Fossil and WellPoint. The Motley Fool owns shares of Fossil and WellPoint.

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

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