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." 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 ...
I usually speak of "the best" in a general, forgiving sense -- the same sense, I suspect, that convinces the Wall Street bankers that they are indeed better stock pickers than the rest of us (despite all evidence to the contrary). Every once in a while, however, one of the firms that truly deserves the title "Wall Street's Best" comes along and publishes a stock recommendation. That happened again this morning, when Credit Suisse upgraded the stock of toymaker Mattel (NYSE: MAT  ) from "neutral" to "outperform."

Since China-made toys began arriving on our shores encrusted in a tasty lead coating, Mattel's stock price has been crushed like a bicycle carelessly left in the driveway. The ongoing scandal has similarly tainted the stocks of toymakers like RC2 (Nasdaq: RCRC  ) and toy sellers such as Target (NYSE: TGT  ) . But according to Credit Suisse, this gives long-term investors a buying opportunity. While acknowledging that toy recalls cost Mattel big money -- $40 million in Q3 alone -- the banker focuses instead on Mattel's "stable to improving margins ... and prodigious amounts of free cash flow." Credit Suisse believes Mattel will bounce back, giving investors the chance to turn lead into gold.

And how good of a record does Credit Suisse have in this field of equity alchemy? To find out ...

Let's go to the tape
We've been tracking this banker for more than a year now, and as I mentioned above, its record is darn good. Credit Suisse gets 58% of its predictions right, and boasts a CAPS rating of 97.53. It's earned this rank partly through toy-related picks such as:

Company

Credit Suisse Said:

CAPS Says:

Credit Suisse's Pick Beating S&P by:

GameStop (NYSE: GME  )

Outperform

*****

42 points

Disney (NYSE: DIS  )

Outperform

****

1 point

On the flip side, I don't see a lot of mistakes in the entertainment sphere on the banker's scorecard. It's made its biggest blunders farther afield, in newspapers and credit cards, for example:

Company

Credit Suisse Said:

CAPS Says:

Credit Suisse's Pick Beating S&P by:

McClatchy (NYSE: MNI  )

Outperform

*

71 points

Capital One (NYSE: COF  )

Outperform

**

25 points

Foolish takeaway
Its record aside, though, what do I think of Credit Suisse's prediction that Mattel will outperform? Actually, I'm not optimistic. I think Credit Suisse is giving Mattel a bit too much credit when it argues that the stock's a buy based on "prodigious amounts of free cash flow." It must have flown right past me, because I don't see it.

As I run the numbers, Mattel looks overpriced on the surface, with a P/E ratio of 15 and 9% predicted growth yielding an unattractive 1.7 PEG. Meanwhile, the firm generates less free cash flow (about $500 million over the past four quarters) than reported net income, giving Mattel a higher price-to-free cash flow ratio than its P/E ratio. The stock may be priced cheaper today than it was when we dumped it from the Motley Fool Inside Value portfolio back in December, but I think it's still overpriced.

And why did we cut bait on Mattel last year? Take a free trial to Motley Fool Inside Value to read our sell recommendation and find out.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 538767, ~/Articles/ArticleHandler.aspx, 12/22/2014 1:35:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement