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: an upgrade for Altria (NYS: MO) , a downgrade for New York CommunityBancorp (NYS: NYB) , and a sell recommendation for Zynga (NAS: ZNGA) . Let's dive right in.
Smoke 'em if you got 'em. (Buy 'em if you don't.)
Our first upgrade news of the day isn't exactly politically correct, but that's OK, says Wells Fargo. With the profits you can make off Altria today, you can buy yourself a six-pack of carbon offsets, and a year's supply of Splenda.
As the analyst argues: "MO is well on its way to achieving a better balance between stabilizing Marlboro market share and growing profitably." Wells is particularly optimistic about the prospects for Altria's "Marlboro Special Blends" and "Marlboro Black" products, and predicts these two products will smoke the competition, and "lead to increased share gains for the brand franchise as early as Q1." (In related news, the analyst pulled its "outperform" rating on rival Reynolds American (NYS: RAI) -- so I guess now we know whom Altria will be gaining its market share from.)
Now here's the bad news: To justify Wells' new price target of $32, Altria's going to have to gain a lot of market share. Don't get me wrong; with its 5.4% dividend yield, shareholders are being well-compensated for entrusting their money to Marlboro. But even with this dividend, Altria's 8% projected growth rate is still too slow to justify the stock's 18.5 P/E ratio. If dividend income is your objective, you're probably better off just sticking with Reynolds (which, like Altria, pays a 5.4% divvy). Conversely, growth investors should look beyond U.S. borders to Philip Morris International (NYS: PM) . The dividend payout is lower, but at less than 18 times earnings, and with a growth rate 50% faster than Altria's (12%), PMI still offers the best bang for the buck.
"I've had all I can stands and I can't stands no more..."
Speaking of stocks you shouldn't buy any more of: New York Community Bancorp. Standpoint Research announced this morning that it's pulling its buy rating on the stock, a mere three months after it upgraded the stock and predicted shares would hit $16 within a year.
We're not there yet -- but even so, this pick's worked out pretty well for shareholders, with NYCB shares gaining a good 13% in three months. Patient investors might prefer to wait for the full projected profit, and keep on collecting their 7.3% dividend checks. On the other hand, NYCB's 4% long-term earnings growth rate doesn't really impress, and the stock's 12.4 P/E ratio means it's considerably more expensive than most "too-big-to-fail" banks. Perhaps capturing a 13% gain (which works out to about 50% annualized) and calling it a day isn't such a bad idea after all.
Game over, Zynga?
Last but not least, Facebook game producer Zynga announced this morning that it intends to flood the market with some 49 million shares of stock, as insiders attempt to cash in on $687 million worth of their stake. This prospect has analysts at Needham & Co. spooked. While conceding its admiration for the company's "competitive strengths ... cash-rich balance sheet, and new market opportunities," the analyst warns of the risks of "greater competition, user churn and slowing growth of Facebook's user base."
Add to this the near-term selling pressure of millions of new Zynga shares coming onto the market, and Needham argues discretion is the better part of valor, and it's best to step out of Zynga till the rush of people heading for the exits has subsided a bit. With Zynga shares now fetching 38 times next year's expected earnings, but believed incapable of growing these earnings any faster than in the low 20s, I can't disagree. 49 million insiders can't be wrong -- it's time to sell Zynga.
If we were Wall Street analysts, we'd probably initiate an overweight rating on The Motley Fool's Top Stock for 2012. Instead, we'll let you decide if you agree with our assessment of this highflier by learning more for yourself. You can download your copy of our report today by clicking here.
Right now, I'm heading over to Motley Fool CAPS to publicly rate Zynga an underperform. Think I'm wrong? Follow along.
Whose advice should you take -- mine, or that of "professional" analysts like Wells Fargo, Standpoint, and Needham?Check out my track record on Motley Fool CAPS, andcompare it to theirs. Decide for yourself whom to believe.
At the time thisarticle was published Motley Fool newsletter serviceshave recommended buying shares of Philip Morris International, but Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.He does, however, have public recommendations available on more than 50 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle "TMFDitty" -- and iscurrently ranked No. 364 out of more than 180,000 CAPS members. The Motley Foolhas 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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