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 ...
Things are looking up in Semiconductor Chip-dom, Fools. On Monday, Credit Suisse came out with a trio of upgrades on the companies that make the machines that make the chips -- Novellus, KLA-Tencor, and Lam Research. CS says it's "tactically bullish" on semis, citing:
- Better-than-expected end-user demand.
- Greater need for companies to spend on capex as DDR3 chips come on line.
- Bullish order trends at Taiwan Semiconductor
(NYSE:TSM) .
Me, too!
One day later, Banc of America Securities jumped on the bandwagon, issuing a batch of upgrades farther downstream in the supply chain:
-
Intel
(NASDAQ:INTC) , Marvell(NASDAQ:MRVL) , and Maxim Integrated Circuits -- all upgraded from "neutral" to "buy." -
LSI
(NYSE:LSI) making the biggest jump, all the way from "underperform" to "buy." - And National Semiconductor
(NYSE:NSM) the smallest, from "underperform" to "neutral."
Like its peers at Credit Suisse, B of A sees "a definitive turn in end demand" supporting its new ratings. Specifically, trends in U.S. electronics shipments suggest chip demand could be half again as much as the banker previously thought (growing 21% in 2010) ... and twice what the rest of Wall Street is predicting. On top of this, B of A sees costs declining and gross margins rising for Intel in particular.
Ah, but are they right?
Let's go to the tape
At first glance, the answer would appear to be: "Yes." Having studied their performance for nearly three years straight, we can tell you with some confidence that Credit Suisse ranks near the top 10% of investors tracked by CAPS; B of A does even better, falling just short of the top 5%.
Yet closer examination suggests there may be problems with this week's bullish sentiment. Turns out that within the semiconductor sector in particular, neither of these bankers has much to brag about. Three years of trying to time the tops and bottoms of the semi market have netted Credit Suisse wins just 49% of the time. And B of A? They're down around 40% accuracy in semiconductors.
Fools, I have great respect for B of A. I've agreed with many of its recommendations over the years -- with some working out, like Netflix
Case study in chip error: Intel
Why not? Because the numbers just don't work for me. Consider: B of A thinks the industry will grow its shipments by 21% next year; by extension, you would assume a bellwether like Intel would mirror this figure closely -- well and good. That tallies nicely with the firm's 20 P/E. If B of A is right about this, that Intel does in fact grow twice as fast as the rest of Wall Street believes it will, and if the firm expands its gross margin on top of that sales growth ... then in the short term, yes, the stock may look attractive -- maybe even cheap.
But how long does B of A believe Intel can continue to outgrow everyone else's estimates by a 2-to-1 margin? Long-term earnings projections on the Street right now call for Intel to post 10% average annual profits growth over the next five years. If Intel rushes out of the gate with superb results in 2010, maybe it can exceed that and add a percent or two to that estimate over the long term. But I have to tell you, folks, with the stock selling for 20 times trailing earnings right now, I don't see a whole lot of margin for error on B of A's Intel recommendation.
Foolish takeaway
Think twice before following Banc of America's advice on the chip sector today. If you're still inclined to buy Intel, think again. Then come to the right conclusion: This stock has too many high expectations priced into it today. Don't buy into 'em.
