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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and worst and sorriest, too.
And speaking of the best ...
International megabank Citigroup is back in the headlines once again this week. As you may recall, Citi found its way into this column last week with its fortuitously timed call in favor of Warner Music Group (NYSE: WMG ) -- an upgrade published just before a New York Post story suggesting that Warner might go private sent the stock flying.
In contrast, in today's news, Citigroup was a bit late to the buzzer. Its upgrade of RF Micro Devices (Nasdaq: RFMD ) came only after that firm announced a purchase of Sirenza Microdevices (Nasdaq: SMDI ) . According to Citigroup, the merger gives RF its "first real prospect in years for gross margin expansion to the 40% range."
Seems a logical conclusion. The two companies are competitors in the radio frequency components business. RF currently grosses about 34% on its sales. Sirenza does closer to 44%. Average the two numbers together, and you're within spitting distance of 40%.
But does that necessarily mean RF is a buy? For clues to how well Citigroup translates basic mathematics into market-whomping stock picks, we turn once again to Motley Fool CAPS.
Let's go to the tape
There we find Citigroup's rank rebounding. After a brief slip-up last week, Citi's once again in the top 10% of CAPS players with a CAPS rating of 90.52 and a record of making correct calls 51% of the time. Most of the improvement, it appears, came from the two-point boost to Citi's accuracy -- out of the 13 up-or-down calls the banker has made since our Warner column ran, Citi's batting 10 for 13. Nice. Here are a couple of its short-term winners:
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Company
|
Citigroup Says:
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CAPS Says:
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Citigroup's Pick Beating S&P by:
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Buckeye Tech
(NYSE: BKI )
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Outperform
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*
|
41 points
|
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Marathon Oil
(NYSE: MRO )
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Outperform
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****
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9 points
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Forty-one points in the four days since Citi rated Buckeye a winner? Yowza! But what about those three short-term losers? They include:
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Company
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Citigroup Says:
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CAPS Says:
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Citigroup's Pick Lagging S&P by:
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|
Constellation Energy
(NYSE: CEP )
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Outperform
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****
|
2 point
|
|
Xenoport (Nasdaq: XNPT )
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Outperform
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*
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1 point
|
Getting back to RF Micro
Citigroup has an enviable record of picking winners, no doubt. Also, occasionally superb timing, as it demonstrated with its picks of Warner and Buckeye last week. But I must admit to some reservations about its wholehearted endorsement of the Sirenza buy.
You see, the $900 million RF is paying to buy out Sirenza translates to 5.6 times the target company's annual sales. RF shares, in contrast, fetch just 1.2 times sales. On its face, this looks like a terribly expensive price to pay.
Profit and growth
But what about Citigroup's argument that it's worth the price to capture Sirenza's growth and higher profit margins? Sorry, but that doesn't hold water either. For while it's true that Sirenza outgrosses RF by about 10 percentage points, by the time you hit the operating margin line, the two firms are essentially equal. RF gets an operating margin of 6.5%, Sirenza just a hair higher at 6.8%. And the growth story looks even more overblown. Analysts project that RF will grow its profits at 22% per year over the next five years. Their projection for Sirenza? Just 18%.
Citigroup's record of success notwithstanding, the numbers just don't add up, folks.
Who else has an opinion on RF Micro? Loads of people -- and on CAPS, they've all got a place to state their mind, and enjoy the fame (or infamy) that comes with a right (or wrong) call. To find out who has the absolute best record on RF Micro, just click here.
Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 272 out of more than 60,000 players. Constellation Energy is an Income Investor recommendation. The Fool has a disclosure policy.
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