At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Blinded by the light
And speaking of the worst, did you hear about Ticonderoga Securities? Like a particularly gullible moth, attracted to the fake flame of an LED lightbulb, the analyst came out this morning with new recommendations to buy LED manufacturer Cree (NAS: CREE) and LED manufacturing equipment makers Aixtron (NAS: AIXG) and Veeco Instruments (NAS: VECO) . Contrariwise, Ticonderoga warned investors away from LED parts maker Rubicon Technologies (NAS: RBCN) .
At least it looks like Ticonderoga got two out of four right -- about as good as a coin flip.
Let's go to the tape
With all three of Ticonderoga's "buy" recommendations outperforming the market today, it seems investors are cheering the news (investors in everyone but Rubicon, at least.) Much as I'd love to join in the party, however, I can't. And much as I'd love to say nice things about Ticonderoga, the analyst's record just doesn't permit it.
According to our records on CAPS, you see, Ticonderoga is awfully close to being one of the awfulest analysts on Wall Street. So far, two years of tracking this analyst's performance have netted us 67 stock recommendations, 56% of which have failed to beat the market. Earlier this week, I shared my doubts with you concerning Ticonderoga's recommendation of General Motors (NYS: GM) , and indeed, already that stock is lagging the S&P 500's performance by more than 11 percentage points. Today, I've even more concerns about Ticonderoga's latest picks. Let's take them one by one, beginning with ...
At a P/E ratio of just 19 and pegged for 21% long-term earnings growth, Cree looks cheap. (Indeed, I can only assume that apparent cheapness is the reason Ticonderoga picked it.) Cree's also clearly a quality business. When shopping around for a manufacturer to help it build a new line of LED lights, General Electric (NYS: GE) quickly settled on Cree as best in show.
Yet as an investment, Cree simply doesn't measure up. Over the past 12 months, Cree claims to have earned more than $146 million in net income. Problem was, the company's cash flow statement shows that in actual fact, Cree generated only $14 million worth of real free cash flow -- 90% less than its reported GAAP earnings. Suffice it to say that, at well over 200 times free cash flow, Cree is anything but a bargain.
Like Cree, Aixtron looks cheap on the surface. A 7 P/E and a 30% growth rate -- what's not to like about that? The problem here is that also like Cree, the GAAP numbers at Aixtron are deceiving. While not quite as cash-poor as Cree's, Aixtron's reported income is also lacking in quality. The company's $303 million in reported profits overstate actual free cash flow here by a factor of five.
Veeco Instruments? I own it myself, so you'd probably expect me to favor at least this Ticonderoga pick -- and you'd be right. Veeco's cash flow statement has deteriorated since I first bought in, but it's still not in quite as bad shape as either Cree's or Aixtron's. Reported income of $355 million outruns actual free cash flow by nearly three times. That's bad, but I still put the company's price-to-free cash flow ratio as just over 11 -- making Veeco a decent bargain if it can achieve analysts' projected 13% annual growth rate going forward. (And if it doesn't, you still have the company's $575 million net cash and short-term investments on the balance sheet to provide some margin of safety.)
Foolish final thought
For these reasons, Veeco is the only one of Ticonderoga's three "buy-recs" that I also endorse today -- it's not the only recommendation the analyst got right, however, because Ticonderoga also told us to sell Rubicon. That's a strange call, given that low P/E ratios seem to be what's attracting the analyst to other companies in the LED sector, and that Rubicon itself sports a sub-6 P/E. It is, however, the right call, inasmuch as of the four LED stocks named, Rubicon is the only one that's actually burning cash, with more than $22 million in negative free cash flow for the past year.
My advice: Buy Veeco, sell Rubicon, and as for Aixtron and Cree -- wait for better prices. Both companies have potential. Both are in an attractive and growing segment of the market. The only mark against them, in my book, is that their prices don't yet match their potential.
(Looking for better bargains in tech? We have a free report right here that will point you toward two of them.)
At the time thisarticle was published Fool contributorRich Smithowns shares of Veeco Instruments.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 412 out of more than 180,000 members.Motley Fool newsletter serviceshave recommended buying shares of General Motors. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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