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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So 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.
This week, a lot of analysts are talking semiconductors, and while they're often talking them down -- Atmel (NAS: ATML) , Intel (NAS: INTC) -- in at least a couple of instances they're talking them up. Let's get the bad news out of the way first, before we move on to Wall Street's favorites, beginning with ...
Atmel sort of sounds like Intel ... Is that good?
Analysts at Maxim Group are starting things off on a down note. Yesterday, Maxim sliced 12% off its target price for Intel (now $29), citing worries that the semiconductor kingpin won't be able to hit a "5-10 percent sequential unit growth" target. Across the PC industry, manufacturers are cutting estimates for notebook shipments. (See Barclays' recent negative note on what this means for hard drive providers like Western Digital (NYS: WDC) .) And according to Maxim, this portends no more than low-single-digit sales growth for Intel in Q3.
The good news? Maxim's a perfectly terrible predictor of how things will go in the semiconductor industry. In fact, according to our stats on CAPS, this bottom-20%-rated analyst gets a mere 9% of its semi recommendations right. (And no, I didn't misplace a decimal). It has a perfect record for active picks, however -- a perfect 0%. And interestingly, one of these stocks that Maxim has been wrong about -- Atmel -- is the subject of Maxim's other target price rollback today. For reasons one assumes track the logic behind the Intel cut, Maxim slashed its price target for Atmel by a similar amount, about 18%.
But here's the thing: Maxim's record of incorrect semi guesses isn't the only reason to think these stocks may perform better than billed. Their valuation nearly guarantees it.
Priced at less than 11 times earnings, Intel looks well positioned to outperform over the long term if it can deliver the 12% earnings growth it's projected to achieve. Add in a 3.3% dividend yield, and this stock should crush the S&P 500's returns quite nicely from today's price point.
Meanwhile, Atmel at less than 12 times earnings lacks Intel's dividend cushion -- but with growth projected in excess of 18%, it hardly needs the divvy to be a bargain.
There's bargains, and then there's ...
As it turns out, the semiconductor stocks Wall Street is recommending actually look to have less chance of outperforming than the ones it's panning. Take Avian Securities' recommendation of RF Micro Devices, for example.
On one hand, the stock isn't quite as expensive as its valuation of 1,323 (!) times earnings would suggest. GAAP earnings at RF are looking anemic, no doubt, and this explains why the P/E ratio looks so sky-high. RF is generating a bit more free cash flow than it reports as net income under GAAP, however -- enough so that when valued on free cash, the stock sells for a pretty reasonable 14 multiple. Relative to its growth prospects, RF looks like a fair bargain. But it's not nearly as cheap as Intel or Atmel.
The situation with Photronics looks similar. A small-cap maker of "high precision photographic quartz plates containing microscopic images of electronic circuits ... used in the manufacture of semiconductors," Photronics can be broadly described as a semiconductor manufacturing-equipment maker. Analysts at Mizuho Securities -- another poor performer on CAPS -- recommended buying Photronics yesterday, and while it's not a horrible idea, it pales in comparison with the prospects of an Intel or Atmel. (And even more so in comparison to the Fool's top stock pick in the sector, which you can read about in this free report.)
Priced at less than 11 times earnings, Photronics is believed by most analysts to be capable of 12% long-term earnings growth. That's a fair price to pay, but hardly the deep discount bargain that Mizuho makes it out to be.
Whose advice should you take -- Rich's, or that of "professional" analysts like Maxim, Avian, and Mizuho?Check out his track record on Motley Fool CAPS, andcompare it with theirs. Decide for yourself whom to believe.
At the time thisarticle was published The Motley Fool owns shares of Western Digital, andMotley Fool newsletter serviceshave recommended buying shares of Intel, but Fool contributorRich Smithowns no shares of, nor is he short, any company named above. He does, however, have public recommendations available on more than 60 other companies. Check them out on Motley Fool CAPS, where he goes by the handleTMFDitty -- and iscurrently ranked No. 320 out of more than 180,000 CAPS members. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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