This Just In: 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.
Well, hello, Hally!
We begin with Halliburton, which received a hearty "hello" from Wall Street this morning in response to second-quarter earnings that dropped only a penny from last year's Q2 -- versus the nickel drop that analysts were expecting. The better-than-expected news was good enough for Standpoint Research, which this morning started up Halliburton with a buy rating.
Standpoint argues that while profits are down, they're not down enough to justify the 44% drop that Halliburton has endured since its highs of Q3 2011. As of today, Halliburton is "the worst performing name in the industry of the ten names with market cap > $5 bln." But this very poor performance may be the thing that makes Halliburton a bargain.
Or not. Listen, Fools. I've got a lot of respect for Standpoint. It isn't often you find analysts consistently scoring 65% and above on the accuracy of their stock picks, as this analyst does. Unfortunately, I fear Halliburton is one of those stocks that's going to end up in the remaining 35% of Standpoint's losers.
Sure, at 9.8 times earnings and a growth rate of better than 18%, Halliburton certainly looks cheap enough. Unfortunately, the quality of earnings at this shop are so poor -- free cash flow of just $250 million, or less than 10% of reported net income -- that I simply have no confidence that Halliburton is as cheap as it looks.
Get your motor running?
Similar story with Motorola Solutions, the ugly step-sister of Motorola Mobility, recently gobbled up by Google (NAS: GOOG) . After sitting flat for close to a year, MS shares could be ready to rally when earnings come out tomorrow -- or so say the analysts at FBR Capital. Fearing the effect this would have on its short position, FBR this morning upgraded the shares to market perform, hoping to avoid a loss if MS surprises to the upside.
They needn't have worried.
On the one hand, MS shares don't look as cheap as Halliburton -- even at first glance. Nineteen times earnings, while not scary expensive, isn't obviously cheap either, not with growth estimates still hovering around 16%. Plus, like Halliburton, MS is the kind of stock where net income doesn't tell the whole tale. Indeed, the $250 million in free cash that MS has managed to generate over the past year isn't enough to back up even one-third of this company's reported $818 million in net income.
Long story short, Motorola Solutions isn't priced to surge post-earnings. If a surge does come, it will only make this too-expensive stock a little bit more so.
And finally, we come to the hot-button portion of the column. Ever since Geron (NAS: GERN) pulled out of the stem cell business (and even before), I've been less than enthused about this business. Now Wall Street seems to be having second thoughts as well.
This morning, WBB Securities renounced its "speculative buy" opinion on Pluristem Therapeutics (NAS: PSTI) , cashing in chips earned when the shares rocketed 16% on last week's news of a Phase 2 clinical trial for use of stem cells in treatment of peripheral artery disease. That news helped get Pluristem back up to just about even with where its share price was one year ago, and WBB is getting out while the getting is good -- reducing the stock to hold.
Good call. With less than $1 million in annual revenues, no profits, and no hope for profits this year (or next), I agree that Pluristem is speculative. It's the buy part that I disagree with. Pluristem has always been a cash-burner, and this new trial is likely to increase the amount of cash it tosses into the furnace every year -- with no guarantee the investment will pay off.
My advice: If you absolutely, positively feel you must invest in stem cells, at least make the smart choice and place your bets on a deep-pocketed mega cap like Pfizer or Glaxo, which can afford to throw good money after bad... or buy stocks like Pluristem (or Geron , or Aastrom, or StemCells ...) out of bankruptcy after they've burned away all of their own cash. When looking to make a ground floor industry investment, this is the smarter, and safer way to play it -- and profit.
Whose advice should you take -- mine, or that of "professional" analysts like Standpoint, FBR, and WBB?Check out my track record on Motley Fool CAPS, andcompare it to theirs. Decide for yourself whom to believe.
The article This Just In: Upgrades and Downgrades originally appeared on Fool.com.Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 342 out of more than 180,000 members. The Fool has a disclosure policy.The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google, Pfizer, and Halliburton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.