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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, 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.
Today, we're going to take a look at three high-profile ratings moves on Wall Street: Downgrades for Procter & Gamble (NYS: PG) and ConocoPhillips (NYS: COP) , and a reprieve for Research in Motion (NAS: RIMM) .
Procter & Gamble's new rating: Hold
With the Dow hitting new highs last week, it was probably time for some stocks to take a breather. First up on the hit list: Procter & Gamble.
This morning, ace investor Stifel Nicolaus dinged the stock over "valuation concerns." That's strange for a couple of reasons -- first, the fact that P&G has basically been sitting at its current valuation for 52 weeks straight, with its shares actually down a half percent over the past year. Second, because Stifel slapped a $70 price target on P&G's stock -- a price $5 above where the shares are trading today!
Now, that's not to say I disagree with the analyst's move. According to our CAPS stats, Stifel Nicolaus is one of the better stockpickers out there. (More than that, it's literally one of Wall Street's Best stock shops.) And when I look at Procter's price today, I think I see why Stifel is calling the stock overvalued.
At 16.5 times earnings, P&G costs a pretty big premium to the sub-9% growth rate that Wall Street has it pegged for. Free cash flow at the firm is also anemic, backing up less than 80% of reported GAAP earnings. And if you ask me, this goes a ways towards explaining why P&G is a company mired in $30 billion of net debt, instead of swimming in cash like archrival Johnson & Johnson (NYS: JNJ) . (Which, by the way, regularly reports free cash flow levels far in excess of net income.) When you add in continued uncertainty over P&G's attempt to unload Pringles onto Diamond Foods (NAS: DMND) , there looks to be little upside at P&G.
ConocoPhillips' new rating: Sell
Speaking of debt-laden large-caps: ConocoPhillips. If P&G investors were disappointed to see their stock downgraded to "hold" this morning, then Conoco phans have to be positively bummed out over the sell rating that UBS just hung on 'em. Like Stifel, UBS is an "A"-rated stock picker, ranked in the top 10% of analysts we track on CAPS. As such, its concerns deserve some weight.
And what concerns are these? As StreetInsider.com reports, UBS believes "the strong pace of share buybacks" is about the only thing that's been keeping Conoco's stock price afloat since it announced plans to spin off its refining and marketing business last year. Breaking the company into its constituent parts, UBS warns, will force the market "to look at COP on a [sum-of-the-parts] basis" and "the increased transparency highlights a premium E&P valuation despite sub-par growth/assets."
Or in other words, pretty soon Mr. Market is going to start wondering if it's right to be paying 9 times earnings for Conoco, when bigger, better Exxon Mobil, for instance, costs only slightly more at 10.5 times earnings ... despite earning a profit margin roughly twice what Conoco makes.
Gee, do you think?
Research in Motion's new rating: Hold
And finally, so as not to end on a down note, let's look at the recent reprieve granted to Research in Motion. After announcing over the weekend that its co-CEOs will be stepping down in favor of new blood, RIM is getting a rethink at Deutsche Bank. The company has finally responded to investors' pleas that it "do something" to fix the sinking stock price by ... doing something.
Maybe not enough to reverse the long-term projections of declining profits. But something. With RIM shares selling for less than four times' annual income, the company's clearly priced as if no one expects to see anything good happen at RIM again -- ever. Personally, though, I'm with Deutsche Bank on this one. With no debt on its balance sheet, $1.3 billion in cash, and $1.8 billion annual free cash flow to work with, I give new CEO Thorsten Heins better than even odds to right this ship. Deutsche's advice to cancel your short bets and count your winnings while waiting to see if Heins can make a go of this business seems sound to me.
At this point, RIM's simply too cheap to continue shorting.
It's not often that I find myself so universally in agreement with the advice coming out of Wall Street. In fact, I can't recall the last time this happened. Then again, it's not often we get advice from three top-10%-ranked analysts in a row, either. Check out my track record on Motley Fool CAPS and compare it to theirs. You may be surprised at how easy it really is to beat Wall Street, and profit from it.
At the time thisarticle was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above. (He does, however, have public recommendations available on 56 separate companies. Check them out on Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and iscurrently ranked No. 361 out of more than 180,000 CAPS members.) The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter serviceshave recommended buying shares of Procter & Gamble and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson.We Fools may not 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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