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.
News that Freeport McMoRan Copper & Gold has decided to turn itself into "Freeport McMoRan Copper, Gold, Oil, and Natural Gas" certainly got investors to wondering yesterday. (Wonder No. 1: Who came up with this harebrained idea?!) But could there be something to the copper-mining giant's sudden interest in oil and gas?
One analyst thinks so. No sooner had Freeport's deal been announced, than megabanker UBS developed a sudden interest of its own in oil stocks, initiating coverage of not one, not two, but nine separate oil and gas plays -- and recommending several of them to investors. Among the Swiss banker's favorites are: Concho Resources , Continental Resources , Cobalt International Energy , Whiting Petroleum , and Kodiak Oil & Gas -- each now rated a "buy" by UBS.
But do any of these stocks really merit their endorsements? Let's take a look:
Free Cash Flow?
You guessed it. No.
Fun with numbers
Now, a few things jump out at us right away from this table. Most notably, the fact that despite having the highest P/E of the bunch, Kodiak Oil & Gas looks like it might be buyable based on its also having the highest growth rate of the group. For P/E/G investors, that's an attractive proposition.
PEG investors might also see much to like in the sub-1.0 ratio at Whiting, and the near-1.0 ratio at Continental. Concho looks less attractive, of course. Cobalt, meanwhile, with no earnings and no analysts going on record with long-term growth predictions, is the biggest black box of the bunch -- perhaps the reason that, when asked to make a case for the company this morning, the best one an Oppenheimer analyst could say about it was that Chevron might take a gamble and buy Cobalt out, salvaging shareholders from a money-losing investment.
That said, it's hard to avoid the conclusion that UBS is making some less-than-stellar calls this week. PEG ratios notwithstanding, the table above is equally clear on the risks of investing in these stocks. None of them pay dividends. Most are heavily in debt. None of them -- not one -- is generating any free cash flow whatsoever, no matter that GAAP accounting standards inexplicably allow them to claim they're earning "profits."
(And for anyone who thinks generating free cash flow isn't important so long as a company says it's profitable, I've got two words for you: Chesapeake Energy (NYSE: CHK.)
Meanwhile, as these debt-laden companies continue to ladle on more debt, burning cash and generating phantom "profits" while they wait for energy markets to turn around, analysts at Canaccord Genuity report this morning that an oil "oversupply imbalance this year has been largely masked by non-recurring storage demand. As this demand fades, OPEC is likely to find it necessary to withdraw excess supply over the next year to maintain market balance in '13/'14."
An improvement in the global economy could fix that by boosting demand but, with China's growth rate in trouble, and the U.S. facing a fiscal cliff, I wouldn't recommend betting on the economy perking up any time soon. Failing that, investors in these cash-burning enterprises can only trust that analysts are right, and that there are more "greater fools" of the sort Freeport McMoRan has shown itself to be, lurking in the wings, waiting for a chance to buy cash-burning oil firms, and bail investors out of their ill-advised investments.
The article This Just In: Upgrades and Downgrades originally appeared on Fool.com.
Fool contributor Rich Smith owns shares of Freeport-McMoRan Copper & Gold. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services recommend Chevron. 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.
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