This Just In: Upgrades and Downgrades

• Email
• Share
• Print

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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Shares of molybdenum miner Thompson Creek Metals (NYSE: TC) are tumbling this morning, leading the market down 7% on the back of a pessimistic World Bank report on global GDP growth and a downgrade from Deutsche Securities. Which would make sense except for one important fact:

The analyst's analysis wasn't really "negative" at all.

Let's go to the tape
I'll explain why I think this in a moment. First though, let's do our usual due diligence, and examine why (or whether) investors should be paying attention to Deutsche's thoughts on Thompson in the first place.

According to nearly three years' worth of data collated by CAPS, Deutsche Securities ranks in the top 20% of investors we track -- but it's hardly infallible. Fact is, the banker's overall record for accuracy on its picks currently stands at 50% -- literally as accurate as a coin flip. What's more, within the metals and mining sectors in particular, this banker actually gets more of its picks wrong ...

Stock	Deutsche Says:	CAPS Says:	Deutsche's Picks Lagging S&P by:
Mechel OAO (NYSE: MTL)	Outperform	*****	48 points
Cliffs Natural Resources (NYSE: CLF)	Outperform	****	28 points
Southern Copper (NYSE: PCU)	Underperform	*****	41 points
Freeport-McMoRan (NYSE: FCX)	Underperform	****	4 points

... than right:

Stock	Deutsche Says:	CAPS Says:	Deutsche's Picks Beating S&P by:
Barrick Gold (NYSE: ABX)	Outperform	****	52 points
Newmont Mining (NYSE: NEM)	Outperform	***	34 points

By which I mean to show you that even if Deutsche was saying today that Thompson's a bad stock, you'd have adequate grounds for deciding this analyst is all wet, and tossing its advice out-of-hand.

But here's the thing, Fools: Deutsche didn't say any such thing. To the contrary, Deutsche argued that based on Thompson's most recent guidance, it's likely the miner will continue to thrive. Deutsche raised its 2009 earnings estimate for Thompson 18%. It raised its 2010 prediction 41%. Why, Deutsche even raised its price target (to $11) -- hardly actions you'd ordinarily associate with a downgrade.

In essence, Deutsche's reason for "pessimism" boils down to this: Awhile back, Deutsche had told investors to buy shares of Thompson Creek. But today, the stock has risen "4-fold from recent lows." Given the run-up, Deutsche thinks there's now more risk, less reward, and so recommends taking some of your winnings off the table.

Heads Thompson win; tails Deutsche doesn't
I disagree. As I argued two weeks ago, Thompson's valuation actually looks quite compelling. The company sells for just 8.5 times trailing earnings, which looks reasonable. More importantly, this miner generated $278 million in trailing free cash flow, putting its price-to-free cash flow ratio at a mere 5.2. Fools, that's cheap -- even before you notice the $240 million in net cash lying around on its balance sheet, which renders the valuation of the business even cheaper.

So basically, the situation breaks out as follows. Either:

• Deutsche's right, and Thompson is a great company that's enjoyed a spectacular run-up that you might want to cash out if you own it; or
• Deutsche's right, Thompson is becoming even more profitable than even Deutsche used to believe, and the stock is going even higher.

Either way, anyone interpreting Deutsche's advice today as "negative" is wrong. Thompson Creek Metals is cheap, its balance sheet solid, and its profits growing. Sounds like a bull thesis to me.