TSC Ratings' Updates: Linn Energy

The following ratings changes were generated on Thursday, Jan. 15.

We've upgraded Linn Energy(LINE Quote), which engages in the development and acquisition of gas and oil properties, from sell to hold. Strengths include its robust revenue growth, compelling growth in net income and good cash flow from operations. However, we find that the company's return on equity has been disappointing.

Revenue since the year-ago quarter leaped by a very impressive 536,863.5%, and net income increased by 1,520.3%, to $1,082.6 million. Current return on equity, however, is lower than its ROE from the same quarter one year prior, a clear sign of weakness within the company. Linn reported significant earnings per share improvement in the most recent quarter compared with the same quarter a year ago. This company has reported somewhat volatile earnings recently, but we feel it is poised for EPS growth in the coming year.

Shares are off by 31% over the year, but this decline was actually not as bad as the broader market plunge during that same time frame. In one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.

We've upgraded Magellan Health Services(MGLN Quote), which provides managed behavioral healthcare, radiology benefits management and pharmaceutical management services, from hold to buy, driven by its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and reasonable valuation levels. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself.