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 downgrade for Lumber Liquidators (NYS: LL) , balanced out by a pair of new buy ratings for Ariad Pharmaceuticals (NAS: ARIA) and Kodiak Oil & Gas (NYS: KOG) . Let's dive right in.
We'll get the bad news out of the way first. If you own shares of specialty flooring retailer Lumber Liquidators -- as many members of the Fool's Hidden Gems and Rule Breakers newsletters do -- you won't be pleased to hear this, but Janney Montgomery Scott just recommended selling your stock.
What caused Janney to abandon its previous neutral rating, and hop down on the negative side of the fence? My guess is fear, plain and simple. LL reports fourth-quarter earnings in just one week, you see, and if the company fails to deliver the numbers Wall Street is expecting, the stock could be in for a world of hurt.
Considering how high the bar has been set for it, Lumber Liquidators could indeed fail. On average, analysts expect LL to deliver $0.35 per share in profit for Q4 -- about 67% better than last year's performance, and 40% better than the company was able to achieve last quarter. This won't be easy, yet investors seem to be taking an earnings beat for granted -- pricing LL at the rich valuation of 25 times trailing profits, despite the company's long-term growth rate being closer to 16%.
And the kicker? Lumber Liquidator's free cash flow is barely half its reported income. Look out below.
In happier news, shares of cancer researcher Ariad Pharmaceuticals received a brand-spanking-new outperform rating from the folks at RBC Capital this morning. As with Lumber Liquidators, Ariad is set to report earnings soon (about two weeks from now), so this appears to be another case of an analyst trying to get ahead of the news -- this time, on the upside.
RBC's not the only one piling into Ariad ahead of results, though. Just last month, analysts at Maxim Group praised Ariad's drug pipeline, and argued the company could be an acquisition target ("patent cliff" victim Merck (NYS: MRK) being one prominent possibility). Other Fools aren't so sure. CAPS members biotechnique and TechnoPharm, for example, have written a few times on our boards to argue that capital raises at Ariad late last year have the company sitting on a $300 million-plus cash pile, and in no need to rush into the arms of an acquirer.
We'll find out in a few weeks how accurate that number is. But if it's anywhere close to correct, the bulls could be right. Ariad's most recent published financials show the company to be burning cash at the rate of "only" $44 million a year. A big bank account won't make Ariad a slam dunk, necessarily -- its drugs still have to work, and win acceptance in the marketplace, and earn a profit margin big enough to justify the stock's $2 billion market cap. But $300 million in the bank should buy Ariad the time it needs to negotiate a fair merger deal, should it be so inclined.
A new oil rush in the Kodiak
Kodiak shareholders will be similarly pleased with the upgrade they just got from Canaccord Genuity. Calling Kodiak "pound for pound the most productive Bakken pure-play," Canaccord slapped a $12.50 price target on this $9 stock, and advised investors to buy Kodiak. According to the analyst, Kodiak "has the right combination of oil leverage, superior capital productivity and catalysts on the horizon." Among them, "drilling initiatives that should capture cost efficiencies and enhance margins."
With a P/E of 53, Kodiak doesn't look like much of a bargain right now. Oil goliath ExxonMobil (NYS: XOM) costs a mere 10 times earnings, for example, and the average within the industry is closer to 13. But according to Canaccord, "Kodiak's above-average growth prospects should warrant a premium to the peer group."
It's a popular opinion. According to Yahoo! Finance, the average growth rate prediction among the 20 analysts who follow Kodiak calls for 50% annual growth -- every year for the next five years. Impressive.
Of course, the company still isn't generating free cash flow from its business (and it never has). Speculators might want to follow Canaccord's lead and buy it in anticipation of better days. More conservative investors, however, might be better advised to stick with Exxon -- $24 billion in annual cash production, and going strong.
Whose advice should you take -- mine, or that of "professional" analysts like Janney, RBC, and Canaccord? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
And if you're looking for an even better way to invest in oil, check out three Fool-approved stocks in our new report: "3 Stocks for $100 Oil."
At the time thisarticle was published The Motley Fool owns shares of Lumber Liquidators, andMotley Fool newsletter serviceshave recommended buying shares of Lumber Liquidators, but 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. 381 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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