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: a new buy rating for game maker Zynga (NAS: ZNGA) , a renewed endorsement (and at a higher target price) for Westport Innovations (NAS: WPRT) , and -- sadly -- a downgrade for Rubicon Technologies (NAS: RBCN) . Let's dive right in.
Zynga's shiny new buy rating
Zynga shares are beating the market with a stick this morning, buoyed by an outperform rating from Robert W. Baird. StreetInsider.com reports that Baird is calling Zynga "an attractive, albeit speculative, investment." (No argument there. At 127 times earnings, Zynga deserves to have its corporate logo featured next to the definition of "speculative" in Merriam-Webster.)
Its high stock price notwithstanding, Baird points out that right now, Zynga is "the most successful digital game publisher." The analyst believes "positive underlying social game trends and newer growth opportunities on smart devices" give Zynga room to grow, and expand its lead.
But how fast will Zynga grow? -- that's the real question. There's no doubt Zynga is a high-quality operation. Free cash flow at the company outpaces reported income by a good 14%. But even that's only enough to bring its price-to-free cash flow ratio down to 78, which is still pretty pricey for a company that most analysts peg at just 22% for long-term growth. I'd stay away from this one till its valuation returns closer to sea level.
Go West(port Innovations), young man
Fans of the natural-gas revolution were thrilled to learn that Northland Securities upped its price target on Westport by 14% this morning. Shares of this alt-energy pioneer are firmly in the "green" even on this "red" day for the markets. And yet, even at the new target of $40, Northland is only calling for about a 10% rise in Westport shares over the course of the next year. That hardly seems like cause for celebration, given that, as a general rule, investors expect the stock market as a whole to rise 10% or more annually.
The timing's also curious, coming as it does a day after Chesapeake Energy (NYS: CHK) announced it's cutting back on natural-gas production in response to too-low gas prices -- sending those prices skyrocketing in response. If this pattern repeats too often, it could undercut the logic for buying companies like Westport, whose business model hinges on nat-gas remaining cheap. And considering that Westport isn't profitable to begin with... Let's just say I'm less optimistic about the company's prospects than Northland appears to be.
Don't cross the Rubicon
Finally -- and with apologies for ending today's column on a down note -- we come to Kaufman Brothers' decision to downgrade Rubicon Technologies. It's nothing personal, you see. In fact, Kaufman also downgraded Veeco Instruments (NAS: VECO) , which makes LED manufacturing equipment. The reason: Kaufman just sees "overcapacity and slower than anticipated LED demand" (gulp!) hurting this industry. That's bad news for Veeco's "tool orders." It also threatens to sap demand for Rubicon's sapphire wafers, used to form the LEDs themselves.
This news isn't exactly a surprise for the market, which already has both companies priced at going-out-of-business levels -- 3.4 times earnings for Veeco, 5.4 times for Rubicon. Kaufman thinks this is at least cheap enough to keep both stocks at hold ratings -- but me, I'm not so sure. Veeco, with about $16 million annual free cash flow and $425 million in the bank, has a much thicker pile of cash to rest on while it waits for an industry turnaround. Rubicon, in contrast, was down to $72 million net cash at last report -- and is burning what it's got at the rate of $11 million a year.
Foolish final thought
Personally, I don't see insolvency risk at either Rubicon or Veeco any time soon. As such, hold ratings seem appropriate here. But that said, Veeco is clearly the stronger company. Should you be inclined to buy on today's weakness in hopes of getting a jump-start on the LED industry's rebound, I'd look at Veeco first, and Rubicon (a distant) second.
At the time thisarticle was published Motley Fool newsletter serviceshave recommended buying shares of Westport Innovations and Chesapeake Energy, but Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above. (He does, however, have public recommendations available on 58 separate companies. Check them out on Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and is currently ranked in the top half-percent out of more than 180,000 CAPS members.)The Motley Fool has adisclosure policy. 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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