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." 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.

Today, Wall Street brought the hammer down on a whole range of stocks, from chip magnates Marvell (NAS: MRVL) and Texas Instruments (NYS: TXN) to oil driller Chesapeake Energy (NYS: CHK) . Were the downgrades justified? Let's find out.

Not so Marvell-ous anymore?
First up, Marvell Technology. Citing "shrinking HDD TAM and TD-SCDMA share loss" at Marvell, analyst Canaccord Genuity hit the mobile semiconductor company with a downgrade to hold and lowered earnings estimates. Worse, Canaccord warned that "additional revisions," and presumably a further downgrade to sell, are possible -- although for the time being, Canaccord likes Marvell's 2.5% dividend yield enough to hold the "sell" in abeyance.

If you ask me, though, Canaccord is jumping at shadows. Sure, market share could slip at Marvell. Market shares ebb and flow all the time in this business. What we know for certain, though, is that based on what the company has actually accomplished so far, Marvell stock looks marvelously cheap.

I'm not talking about the P/E ratio, either (although an 11.6 P/E on a 14.2% projected grower certainly is cheap). When I look at Marvell, what I see is a company generating more than $640 million in free cash flow, boasting $2.1 billion cash in the bank (and zero debt), and therefore selling for an enterprise value-to-free cash flow ratio of just 4.5. On a 4% grower, that would seem pretty reasonable. On a stock like Marvell, projected to grow at 14%, it's just ridiculously cheap -- and Canaccord is wrong to downgrade it.

I'm so convinced of this, in fact, that I'm throwing down the gauntlet on this one and publicly predicting on CAPS that Marvell Technology will outperform the S&P 500 over the next five years. Who will be proved right in the end? Canaccord Genuity, or me? Follow along and find out.

Wall Street messes with Texas
Another chip stock that got whooped on by Wall Street this morning, and more deservedly so this time, is Texas Instruments. On Wednesday, TI got hit with not one, but two separate analyst downgrades as first Oppenheimer blasted management's "shift in wireless strategy, with plans under way to discontinue wireless ... investment for smartphone/tablet." Said the analyst: "Wireless (~10% of sales) will likely see revenues dwindle over the next several years as the business slowly unwinds, much as the baseband exit created material top-line headwinds," leaving the stock "limited" upside, and forcing Oppenheimer to downgrade and pull its price target.

In no time flat, Avian Securities piled on with a downgrade to neutral -- and for good reason. Priced at 20 times earnings, but with a long-term growth rate estimated to be only in the single digits, TI was already a very pricey stock. Factor in the uncertainty of its new business model, and there's really precious little for shareholders to feel optimistic here about today.

Chesapeake is all wet
One thing I'll say for today's final downgrade: At least with a P/E ratio of 6.3, and a projected growth rate of almost 9%, Chesapeake doesn't look expensive. (It actually is expensive -- very expensive, in fact, and we'll get to that in a minute -- but at least it doesn't look it.)

Credit is due to Stifel Nicolaus, then, for seeing through the smoke and mirrors to downgrade Chesapeake to hold this morning. You see, while technically profitable on a GAAP basis, finding a way to report a GAAP profit has rarely been Chesapeake's problem. Rather, Chesapeake's problems are twain.

First, the company's drowning in debt, with a debt load that amounts to $13.6 billion net of cash. Second, and corollary to the first point, the company shows little interest in generating cash from its business necessary to pay down this debt. Since 2006, the company hasn't once reported a free cash flow-positive year. To the contrary, over the past 12 months, Chesapeake dug itself more than $11 billion deeper into the hole as cash-burn ran rampant.

Granted, some analysts (including some right here at the Fool) think the company will turn itself around and profit from the increased popularity of natural gas as fuel. For the time being, though, the company's future is uncertain. And Stifel's suggestion that Chesapeake's a hold? That's about the best anyone can say for Chesapeake: Hold on by your fingernails, and hope for the best.

On the other hand, if you want to make money on energy stocks -- fancy that! -- you may be better off reading our latest report on the industry. Click here, and find out which stock is The Only Energy Stock You'll Ever Need.

Whose advice should you take -- Rich's, or that of "professional" analysts such as Canaccord, Oppenheimer, and Stifel?Check out Rich's track record on Motley Fool CAPS, andcompare it with theirs. Decide for yourself whom to believe.

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Fool contributorRich Smithis neither long nor short any stock named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 292 out of more than 180,000 members. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Fool has adisclosure policy.

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