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.
Break out the champagne and Rice-A-Roni
United Technologies (NYSE: UTX ) shareholders received a "San Francisco treat" yesterday, in the form of a buy recommendation from Wells Fargo. Highlighting cost reductions and fewer restructuring charges at the company, Wells predicted United Technologies (UTC) will grow its earnings "in 2010 and beyond."
What's more, Wells doesn't even think the recession has to end for this to happen. To the contrary: "the company is positioned well for future earnings growth even without end market growth." According to the banker, even if demand does not pick up among UTC's customers, the mere fact that the company has cut costs will enable it to post "double-digit earnings growth next year." Wells calls the stock "a core holding" and recommends buying it today.
Should we care?
Apparently not -- or at least, that's the way investors are acting. Despite the favorable report out of Wells, UTC shares fell along with the rest of the market yesterday. That's not the way these kinds of ratings ordinarily work, and I have to tell you, folks -- that got me curious.
Let's go to the tape
After all, Wells Fargo isn't exactly a no-name brand. To the contrary, it's one of the few major banks to emerge from the recent banking apocalypse looking bright and shiny. Reportedly, it's also Warren Buffett's favorite bank. But here's the thing -- Buffett may believe in Wells Fargo. But up till now, none of the rest of us has had much reason to.
Why not? Historically, Wells Fargo has refrained from making public stock recommendations. I'm sure it had opinions -- it just wasn't voicing them, so there was no way to quality check its thinking. But that changed last month, when Wells Fargo suddenly began reporting ratings through ratings aggregator Briefing.com. Over the past month, Wells Fargo has made 15 recommendations public via Briefing.com -- UTC comes in at No. "Sweet" 16.
And how has Wells performed so far? I'm sorry to say that it's off to a pretty rocky start; only 30% of the banker's picks are beating the market. Winners to-date include:
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Stock
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Wells Fargo Says:
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CAPS Says:
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Wells Fargo's Picks Beating S&P by:
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|
Paychex (Nasdaq: PAYX )
|
Outperform
|
****
|
3 points
|
|
Take-Two Interactive
|
Outperform
|
****
|
1 point
|
|
NII Holdings (Nasdaq: NIHD )
|
Outperform
|
*****
|
14 point
|
On the other hand, Wells' losers include:
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Stock
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Wells Fargo Says:
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CAPS Says:
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Wells Fargo's Picks
Lagging S&P by:
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|
AIG
|
Underperform
|
*
|
23 points
|
|
Time Warner (NYSE: TWX )
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Underperform
|
**
|
2 points
|
|
America Movil (NYSE: AMX )
|
Outperform
|
*****
|
10 points
|
Granted, these picks have been "active" for less than a month, so have not had time to "ripen" -- but early progress is not good. Moreover, it's worth pointing out that while "Wells Fargo" had not previously publicized its stock recommendations, the analytical shop that Wells ate last year -- the banker formerly known as "Wachovia" -- does have a record.
I'll bite. So how does "Wachovia" stack up?
That's the other bad news. Back before Wachovia was Wells, this banker too had a mixed showing picking winners in the aerospace sector:
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Stock
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Wells Fargo Says:
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CAPS says:
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Wells Fargo's Picks
Lagging S&P By:
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|
Boeing (NYSE: BA )
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Outperform
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***
|
15 points
|
|
Northrop Grumman (NYSE: NOC )
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Underperform
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***
|
6 points
|
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BE Aerospace
|
Outperform
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*****
|
6 points
|
Nor do I expect this week's recommendation to fare much better. The reason being: Wells picked too high a price to enter this position. Selling for 12 times free cash flow and 14 times reported GAAP earnings, UTC may not be the most expensive stock on earth -- but it's still too expensive relative to the 8% long-term growth that most analysts predict for it. (And let's face it, folks -- there are better bargains out there. So why overpay for this one?)
The valuation proposition looks even worse when you factor in UTC's moderate debt load. But to be honest, there's no need to even go into that. UTC's overpriced on its face.
A stinker by any other name will still not come up roses
Put it all together, and I think you can understand why investors may be less than enthused about this banker's buy rating. Call 'em "Wells Fargo." Call 'em "Wachovia." But don't call these folks when seeking advice on the aerospace sector.
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