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.
And speaking of the best...
Christmas came early for oil investors yesterday, when ace energy analyst Credit Suisse initiated coverage on a half-dozen oil services picks: Schlumberger (NYS: SLB) and Weatherford (NYS: WFT) , Baker Hughes (NYS: BHI) , FMC, Halliburton (NYS: HAL) , and Cameron (NYS: CAM) . Of the six, CS only thinks Hally and Cameron have a chance of outperforming the market. But just knowing where CS stands on the rest may be enough to help some investors avoid losing money. (Or maybe not...)
Why? Because when it comes to picking oil stocks, there aren't many analysts out there who can beat Credit Suisse. Ranked in the top 10% of investors we track on CAPS, CS boasts a record of 51% accuracy on its oil stock picks. And while that doesn't sound great, the stocks it has been right about do so much better than its losers, that across the industry CS is beating the market by a combined 877 percentage points of outperformance on its oil picks.
If only we could say the same thing about its oil services picks.
Every rose has its thorn
Turns out, you see, Credit Suisse has one critical flaw when it comes to energy stocks, and that's its anemic record in the field of energy equipment and services -- the companies that help the oil companies do that thing they do so well. Of the two-dozen or so energy services stocks CS has recommended over the past six years, only a handful of real winners were picked by the bank. Just 29% of its recommendations here beat the S&P 500 by significant margins.
This in and of itself should make investors pause before rushing out to buy Halliburton and Cameron simply on CS's say-so. But it's not the only reason to be cautious. Let's take a quick look at the numbers:
Projected Growth Rate
*All data from finviz.com.
Right off the bat, you can see that something doesn't add up here. On the one hand, yes, Halliburton certainly looks cheap enough with a P/E ratio barely half its projected five-year forward growth rate. On the other hand, so does Weatherford. Yet CS says you should buy Hally, but not Weatherford.
And who does the analyst urge you to buy instead? Cameron International -- the stock with the second-highest PEG ratio on the list!
Similarly, sure, Schlumberger and FMC look pretty pricey. But Baker Hughes sports a P/E ratio second only to Hally in cheapness, which when combined with a respectable growth rate gives it a cheap-seeming PEG ratio of 0.8. Even so, CS doesn't think you should buy it.
Where's the cash?
Meanwhile, according to S&P Capital IQ, not one of the companies named up above is generating positive free cash flow at anywhere near the levels they are reporting for net income under GAAP. Indeed, three of the companies -- Baker Hughes, Cameron, and Weatherford -- are actually burning cash. Each is spending more on capital expenditures than they bring in as operating cash flow.
That's disturbing, as it tends to belie the "bargains" we're seeing at Weatherford and Baker Hughes. (Although it may help explain why Credit Suisse didn't recommend either of those stocks). It also means that Credit Suisse may be off-base in recommending that investors buy into cash-burning Cameron.
As for the "last company standing," Halliburton remains the only stock on the list boasting a sub-1.0 PEG ratio, and positive free cash flow. Not a lot of free cash, mind you. Not enough to entice me to buy, at any rate. But for traditional, investors seeking low P/E stocks with strong projected growth rates, Halliburton looks to be the best bet you're going to get -- or at any rate, the best idea that 29%-accurate Credit Suisse can come up with.
Looking for a better idea? With the swelling of the global middle class, energy consumption will skyrocket over the next few decades, and long-term investors know we need exposure to this space now. We've picked one incredible natural gas company that presents a rare "double-play" investment opportunity today. We're calling it "The One Energy Stock You Must Own Before 2014," and you can uncover it today, totally free, in our premium research report. Click here to read more.
The article This Just In: Upgrades and Downgrades originally appeared on Fool.com.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 298 out of more than 180,000 members. (For comparison, Credit Suisse is ranked No. 4,307). The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.