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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Two stars of the silver screen
You may not have heard about this, but Netflix (NAS: NFLX) has been running into some difficulties lately. First it shot itself in the foot when it surprised customers with a 60% rate increase and then "Qwik-ly" proceeded to shoot itself in the brain with a corporate restructuring-cum-name-change. The net result of the biggest example of corporate suicide in recent memory has been a 60% decline in market cap over the past three months. But according to one analyst, that's actually good news ... for new investors.
According to B. Riley, it makes Netflix a "buy."
In a curious instance of dual buy-ratings, investment banker Riley initiated coverage on both Netflix and one of its biggest rivals yesterday, urging investors to buy shares of both Netflix and Redbox operator Coinstar (NAS: CSTR) . Crunching the numbers, Riley argues that Netflix shares have nearly 50% upside today, and are worth $162 apiece, while Coinstar could do even better -- rising more than 60% to hit $80 a share within a year. But does Riley know what it's talking about?
Let's go to the tape
Nothing's ever certain in this world we live in, but I actually think Riley might be onto something here. Why? Well, let's start with the analyst's record. Riley hasn't been a particularly active stocks-rater in recent months. In fact, according to the folks at Briefing.com, the analyst hasn't filed a single public recommendation through the ratings aggregator in nearly a year.
That's a crying shame, because, according to the research we were able to do on Riley back when it was distributing its advice regularly, this is one bang-up analyst. Over the past five years, Riley has achieved better than 54% accuracy on the recommendations it's made, with the average Riley stock pick soundly beating the Dow Jones Industrial Average (INDEX: ^DJI), and outperforming the S&P 500 by nearly 10 percentage points per pick. This performance had Riley ranked in the top 10% of investors tracked on CAPS by the time the analyst went dark.
Netflix: a dark-horse candidate for deep value
Now, I know a lot of customers -- and investors -- are upset with Netflix right now. When Amazon.com (NAS: AMZN) announced that it would begin bundling free movie-streaming with its "Prime" free shipping service last year, its grab-bag of "B" movies and stale television serial offerings was pretty much laughed out of the room. Netflix's fumbles, however, have started to make Prime -- and Amazon -- look like a viable -- and cheap -- alternative. Netlix also couldn't have timed its debacle better if it was aiming to help Wal-Mart (NYS: WMT) launch a rival streaming service. And yes, Apple's (NAS: AAPL) pricier downloads, and new streaming options from Google (NAS: GOOG) and YouTube remain constant threats.
Still, despite all the help Netflix's unforced errors have given the competition, analysts still expect to see the company grow earnings at a near 30% annual clip over the next five years. If they're right about then, then I can't help but agree with B. Riley that the stock is now looking attractive.
Netflix today costs just 28 times trailing earnings, and about 19 times trailing free cash flow. Sure, these numbers could shift a bit when Netflix reports earnings next week. But as for today, based on what we know now, the stock's selling for under a 1.0 ratio of both P/E to growth -- the very definition of a "fair price."
Will Netflix blow it again on Monday or "blow it out da box?"Add the stock to your Fool Watchlistnow, and be first in line to get the news when it happens.
At the time thisarticle was published Fool contributorRich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 295 out of more than 180,000 members.The Motley Fool owns shares of Wal-Mart Stores, Apple, and Google.Motley Fool newsletter serviceshave recommended buying shares of Google, Netflix, Wal-Mart Stores, Amazon.com, Apple, and Coinstar, creating a bull call spread position in Apple, and creating a diagonal call position in Wal-Mart Stores.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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.