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 ...
Investors in Wynn Resorts (Nasdaq: WYNN) were exchanging high-fives and buying rounds o' drinks this morning. (Really, guys? Isn't it a little early to be breaking out the Chivas?) And what made 'em feel like high rollers? Simple -- their shares were soaring far ahead of the rest of the market Thursday morning, enjoying a bit of a delayed bounce now that investors feel free to react to the bullish prognosis that came from market maven Oppenheimer on Wednesday.

Calling Wynn "the best capitalized casino company" in the world, and pointing out that it was rapidly becoming the cheapest as well, with shares down 21% in a month's trading, Oppenheimer pulled the lever, ringing up an "outperform" rating for Wynn. But should you place a side bet that Oppenheimer's right? That's the question of the hour.

Let's go to the tape
I'm not at all certain that Oppenheimer is right on this one. Now, I'll grant you that Oppenheimer has made some amazing stock picks in its day. In particular, the courageous decisions to back both Apple (Nasdaq: AAPL) and Motorola (NYSE: MOT) in the depths of the Great Recession earlier this year have paid off handsomely -- producing a double on Apple, while Motorola motored even higher.

But consider Oppenheimer's record in the more relevant hotels, restaurants, and leisure sector. Over the past three years, Oppenheimer has made 21 affirmative buy/sell recommendations in this space. Of these, fewer than 35% are outperforming the market -- and even then, often just barely:

	Oppenheimer Says:	CAPS Says:	Oppenheimer's Picks Beating (Lagging) S&P By:
Penn National (Nasdaq: PENN)	Outperform	**	<1 point
Ameristar Casinos	Outperform	**	(42 points)
Isle of Capri	Outperform	*	(54 points)

Moreover, Oppenheimer's better picks in the sector -- Motley Fool Hidden Gems recommendation Ctrip.com (Nasdaq: CTRP), for example, or Life Time Fitness -- have little to do with gambling. In contrast, Oppenheimer's single worst recommendation in the sector was ... Wynn Resorts. Oppenheimer told investors to sell it back in April, but anyone who followed that advice is now licking their wounds on a 77-percentage-point loss to the market.

Ouch
Ouch, indeed. But that's not to say that Oppenheimer is totally incoherent on Wynn. In fact, I do see some basis for optimism, now that the successful Wynn Macau offering in Hong Kong has filled Wynn's coffers with $1.6 billion in IPO cash -- and according to management's most recent report, left the company with a "mere" $1 billion in net debt. ("Mere" being my word, not Mr. Wynn's -- but if you've taken a look at Las Vegas Sands (NYSE: LVS) or MGM Mirage's (NYSE: MGM) balance sheets lately, I think you'll agree it's appropriate.)

And ouch, again
It's just that, on balance (pun intended), I think Wynn's negatives still outweigh its positives. Why? Consider the cash flow statement. Over the past five fiscal years, Wynn has averaged about $270 million in annual operating cash flow -- but its capital spending has hewn closer to a $1 billion per-year average. That's a massive outflow of cash, folks, and with little to show for it in the way of true free cash.

I take some comfort in management's statement that "[c]apital expenditures during the third quarter of 2009 [approximated] $124 million" -- and believe this may indicate Wynn is tapping the brakes on its splurge. But the company's still laying out a whole lot more cash on building its resorts than these resorts have proven themselves capable of bringing in the doors. Which doesn't strike me as a winning bet.

Foolish final thought
Will Wynn's new ventures in Macau reverse the tide of red ink? Place your bets below -- but as for me, I'm not betting on Oppenheimer, or Wynn Resorts, this time.