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.
Raymond James discovers the Internet (and likes it)
According to Al Gore (at least apocryphally), the former vice president "invented the Internet" roughly two decades ago. But if that's true, it was news to Wall Street investing house Raymond James. Only yesterday, the analyst initiated coverage on the industry with a series of nine recommendations -- some high-profile, some less so. Here's a quick rundown:
Real estate website Zillow (NAS: Z) , Chinese travel agent Ctrip.com (NAS: CTRP) and its American analog Expedia (NAS: EXPE) , and restaurant reservations specialist OpenTable (NAS: OPEN) -- all of these RJ initiated with market perform ratings.
China's "Google," Baidu (NAS: BIDU) ; name-your-own-price priceline.com (NAS: PCLN) ; Latin American flea market MercadoLibre (NAS: MELI) ; online sports reservation specialist Active Network; and photo developer Shutterfly -- all of these got tagged outperform or better.
Not impressed with the mere fact of some wannabe market-mover endorsing a handful of stocks and declining to endorse others? I can't say I blame you. Although there was a time when Raymond James stood atop the ranks of Wall Street's best analysts, that time is long past. It's been more than a year since this analyst stopped providing its ratings to Briefing.com for independent review by investors. And while up to that point, RJ had maintained a strong record of outperformance (beating the S&P 500 average on about 63% of its picks), we've no assurance that the analyst is still doing so today.
Still, the analyst's opinions seem to carry some weight. Yesterday, the majority of the stocks RJ rated outperform or above gained in stock price (Active Network in particular tacked on 5%), while all of the stocks RJ declined to endorse lost value. But seeing as RJ lacks a public record to back up its endorsements, should investors really be rushing to buy the stocks it tells us to? Maybe, just maybe, it's worth taking an independent look at these recommendations, to see if they hold water, beginning with...
Buy, buy, Baidu?
Right off the bat, I have to say that I like RJ's top pick of the week: Baidu. At a share price 51 times trailing earnings, the stock may seem expensive. But when you consider that most analysts expect Baidu to grow its earnings at 48% per year over the next five years, that price may not be as pricey as it seems. Consider too that Baidu has historically generated far more free cash flow than it's claimed as net income, and I'd say the chances look good that RJ is right about this one -- and that Baidu really is a buy.
The priceline is right
Likewise, I think RJ's found a winner in Priceline. Its 27 times trailing earnings and 28% long-term growth rate suggest only fair valuation at first glance. But Priceline's just coming off another blowout quarter, a quarter in which -- like Baidu -- it showed cash profits that continue to exceed reported net income by significant margins. At 22 times free cash flow, Priceline looks priced to move.
MercadoLibre -- Como se dice en Ingles "muy caro!"?
I wish I could say the same about MercadoLibre. But the truth is that while "South America's eBay" cedes no ground to Baidu and Priceline in the high price-tag department, the company's growth rate just isn't up to snuff. In any other country, on any other stock, I'd say that MercadoLibre's projected 33% annual growth rate is very nice indeed. But it simply isn't fast enough to justify paying 54 times earnings (and 55 times free cash flow) on this stock.
Active and Shutterfly
Since I just told you that MercadoLibre is too expensive, you can probably guess what I think about these last two RJ picks. Shutterfly is a great service for digital camera-philes, and I love the service. But at 106 times earnings, this stock gets no love from me. Meanwhile, Active Network currently has no profits at all -- and isn't expected to earn any next year, either.
And that's OK. Not every card's a winner, but the fact remains that after dealing out nine suggestions, Raymond James seems to have given us at least two winning investment ideas: Baidu and Priceline. So give the analyst a hand... and give these stocks a look. I think you'll like what you see.
But just in case two great stock ideas aren't enough for you, here's a third: Here at the Fool, our research team has just uncovered "The Only Energy Stock You'll Ever Need." Read all about it in our new -- and free! --report.
At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 325 out of more than 180,000 members. The Motley Foolhas adisclosure policy.Not all Fools think alike. As it turns out, while Rich may not approve of all of Raymond James' ideas, the Motley Fool owns shares of Ctrip.com International and OpenTable. Also,Motley Fool newsletter serviceshave recommended buying shares of Active Network, Baidu, MercadoLibre, Ctrip.com, priceline.com, Zillow, and OpenTable.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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