This Just In: More Upgrades and Downgrades

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: new upgrades for Chevron (NYS: CVX) and Williams Cos. (NYS: WMB) , but a downgrade for Thompson Creek (NYS: TC) .

Chevron's coming a-gusher
Let's start with the good news. Oil prices are high. I suppose that's bad news if you own a car, but it's cause for rejoicing if you own shares of Chevron. This morning, analysts at Deutsche Bank upgraded shares of Chevron to "buy," citing the high price of Brent crude and saying Chevron is undervalued because it's "leveraged" to the price of Brent.

Chevron is also undervalued because ... it just is. Or, at least, it's undervalued relative to the competition. At 8.2 times earnings, Chevron shares sell for roughly a 33% discount to the average P/E ratio among major integrated oil and gas stocks. True, with oil prices as high as they are, profit margins are probably pretty close to their peak. As a result, analysts only expect Chevron to post about 4% annualized profits growth over the next five years. On the other hand, the stock pays a tidy 3% dividend, which should help take the sting out of the slow growth rate.

Personally, I'm a little worried by the fact that Chevron only generates about 54% as much free cash flow as it reports for net income. That's better than ConocoPhillips can claim, but worse than ExxonMobil. For this reason, I wouldn't be a buyer of Chevron at today's prices. But if you're more of a PEG investor, or simply looking to beat the 0.1% interest rates on offer at your local bank, Deutsche's recommendation may appeal to you.

Is Williams winning?
An even better idea may have arrived this morning in the form of Goldman Sachs' upgrade of Williams Companies to "conviction buy." Like Chevron, Williams has a spotty record in the free cash flow department. (Indeed, in many years, the company fails to generate free cash at all.) But in at least two respects, Goldman's pick beats out Deutsche's: Williams Cos. pays a 20% better dividend than does Chevron (3.6%). And for value investors, its 18 P/E ratio and 21% projected growth rate make for a more attractive PEG ratio than Chevron offers.

Goldman notes that Williams also generates "a solid portion of earnings from stable, fee-based pipelines." The low price of natural gas should logically result in increased usage (and shipment) of the fuel. When you combine this with the tollgate nature of Williams' transport business, Goldman thinks we could see "above-average 10%-15% dividend growth" at Williams.

Thompson Creek crumbles
The outlook is less sunny for miner Thompson Creek. This morning, Dahlman Rose announced it was downgrading the stock to hold. Don't get 'em wrong -- Dahlman likes Thompson's copper and gold businesses. The problem here stems from another metal entirely: molybdenum. According to Dahlman, you see, there's a big increase in molybdenum supplies coming down the pike. "Over the next 3-4 years, we anticipate that molybdenum prices will be range bound ... due to pricing pressures."

As you've probably heard by now, China is increasing export quotas on a range of home-produced metals. China is the world's biggest producer of molybdenum, and if it turns out that moly is one of the metals that China's loosening up on, this could be bad news indeed for Thompson Creek.

How bad? Dahlman predicts Q1 2012 will see Thompson post a $0.10-per-share loss, followed by a mere nickel in per-share profit for the full year. That's quite a walkback from previous expectations of $0.35 per share in 2012 earnings. And if Dahlman's right about this, it means that Thompson's current P/E ratio of five is nothing at all like what it will look like in 12 months. Today's P/E is based on trailing earnings of $1.43 per share. But at just a nickel a share in profit, that P/E ratio would shoot up to 145.

Foolish final thought
Based on these worries, Dahlman is downgrading Thompson to hold. But here's the thing: Even Dahlman's previous earnings guess ($0.35 per share) would only price Thompson at 21 times earnings, or about the same 21% long-term rate of earnings growth it's pegged for. That being the case, I fear Dahlman's behind the curve on this one. Thompson was only fairly priced before the molybdenum glut appeared. If things are really going to get as bad as Dahlman says they will, you're probably better off just selling the stock entirely.

Whose advice should you take -- mine, or that of "professional" analysts like Deutsche, Goldman, and Dahlman?Check out my track record on Motley Fool CAPS, andcompare it to theirs. Decide for yourself whom to believe.

And if you're looking for a natural resources stock with better potential than Chevron, Williams, or Thompson Creek, check out our new Fool report "The Tiny Gold Stock Digging Up Massive Profits."

At the time thisarticle was published Motley Fool newsletter serviceshave recommended buying shares of ExxonMobil and Chevron, but Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.He does, however, have public recommendations available on 57 other companies. Check them out on Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and iscurrently ranked No. 409 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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