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.
Dougherty doubles down on OCZ Tech
Earlier this week, the good folks at UBS investment bank set a $34 price target on Intel (NAS: INTC) . The reason: According to UBS, Intel is about to remake the laptop computer market with its billion-dollar Ultrabook initiative.
By reducing the cost of computer processors for the ultralight, hard-drive-less PCs, Intel is expected to slash the cost of Ultrabooks by 20% from their current levels, cutting the floor out from under Apple's expensive MacBook Air, and forcing a wholesale shift in the PC market as consumers flock to the new devices -- capturing 40% of all laptop sales globally in 2012.
An ambitious goal, you say? It is. UBS is predicting no less than an entire new "notebook replacement cycle," the first one we've seen since 2009. But if the analyst is right, this could mean great things for companies like SanDisk (NAS: SNDK) , Micron (NAS: MU) , and OCZ Technology (NAS: OCZ) , which build the solid-state drives that are expected to provide memory for ultralight Ultrabooks -- and the storage servers that will facilitate their accessing the Internet.
Pick a winner, any winner
Perhaps reading from the same playbook, yesterday, the analysts at Dougherty & Co. announced that they expect to see OCZ in particular benefit from "hyper-growth" in the SSD market. According to Dougherty, OCZ is now one of the "premier SSD providers" out there, and is protected by "significant barriers to competitive threats" from the likes of SanDisk and Micron. Dougherty believes we will see OCZ shares (currently at $9 and change) hit $13.50 per share before the year is out, giving investors today a shot at a quick 50% profit.
But is Dougherty right about that?
Let's go to the tape
I'll admit the possibility. One of our better CAPS "players," Dougherty ranks in the top 15% of analysts we track on CAPS. It's even (almost) as accurate as a coin flip -- nearly half of the stocks Dougherty recommends actually do end up outperforming the market. (Here: See for yourself.) I just don't think OCZ is going to be one of them.
You down with OCZ?
Why not? Well, let's begin with the obvious: With no trailing profits to its name, it's hard to say OCZ looks like a bargain. As for Dougherty's "hypergrowth" claim, the 10 analysts who track the stock generally agree that OCZ may be able to grow its profits at 20% per year over the next five years. But while a respectable number, I'd hardly call 20% "hyper" anything. In fact, it's below the average rate of growth predicted for this industry (which is greater than 25%). Meanwhile, OCZ still isn't generating free cash flow from its business. Instead, it burned $75 million last year, and hasn't generated any free cash whatsoever since 2007 (and only a couple of million back then).
As far as Dougherty's claim that OCZ is a "premier SSD provider" goes... you'd probably expect that a premier company would produce premier profits -- or at least a profit margin a smidgen superior to what its competitors earn. But not this one.
Instead, OCZ only booked a 19% gross margin last year. That's not bad relative to Micron, I guess. But it's about 25 percentage points lower than what you'll find SanDisk or even STEC grossing -- yet it's the best number OCZ has managed since as far back as 2004.
Dougherty & Co. is not a horrible stock analyst. On the whole, it's probably not too much worse than the average stock picker you'll find on Wall Street. But when Dougherty tells you to sink your hard-earned money into OCZ, it's totally off-base. There's only one direction OCZ is going, folks: down.
In fact, I'm so convinced that this stock is a dog that I'm going to put my reputation on the line and publicly rate it an "underperformer" on Motley Fool CAPS.
Think I'm wrong? Follow along.
On Motley Fool CAPS, Rich's skepticism has served him well, and he's racked up a record of 72% outperformance over the S&P 500. Even so, he doesn't hate all stocks equally. To learn more about one stock Rich likes (at least, more than he likes OCZ Tech), read the Fool's new report on: "The Next Trillion-Dollar Revolution."
At the time thisarticle was published Fool contributor Rich Smith owns shares of SanDisk. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 425 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services have recommended buying shares of Apple and Intel, as well as creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.