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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 ...
What do you do when one of the (reputed) best stockpickers on the planet tells you to sell one of the biggest names in American defense? Personally, I listen up. And from what I hear, Goldman Sachs thinks Lockheed Martin (NYSE: LMT  ) is a dud. What's got Goldman's armor-plated panties in a bunch? Let's find out ...

Calling Lockheed the "most visible" and "platform-exposed" defense contractor in the country, Goldman added the stock to its hit list Wednesday -- tagging it with the dread "Conviction Sell" rating. Goldman warns that Lockheed's marquee program -- the F-35 Joint Strike Fighter -- is about to run into "major challenges" in 2010, challenges that will negatively affect the stock price. Goldman further suggests we will see price competition in the industry, a trend toward government "in-sourcing," and a federal crackdown on conflicts of interest among contractors who both advise, and supply the government, combining to blunt profits in future quarters.


Let's go to the tape
Or not so much. For months, I've lamented our ability to get a real good read on how well Goldman's predictions play out in practice. Because the analyst has cut off from access to its ratings, the analyst -- unlike most major Wall Street investment banks -- has insulated itself from public scrutiny of how well its recommendations actually perform. No longer.

For the past several weeks, I've been tracking down Goldman ratings wherever they appear, and placing them in a CAPS-centered database so that we can see how well this analyst thinks. The result? Well, see for yourself. On the one hand, you'll find it unsurprising to learn that this banker has some skill in picking winning bank stocks:


Goldman Says


Goldman's Picks Beating S&P By

Wells Fargo (NYSE: WFC  )



2 points

Bank of America (NYSE: BAC  )



4 points

On the other hand, however, Goldman is also racking up a surprising assortment of losers in its portfolio:


Goldman Says


Goldman's Picks Lagging S&P By

General Electric (NYSE: GE  )



5 points

Potash (NYSE: POT  )



1 points

Accenture (NYSE: ACN  )



2 points

Oracle (Nasdaq: ORCL  )



2 points

With nearly five dozen ratings to its name so far, Goldman Sachs' gold-plated reputation is beginning to look a bit tarnished. Only 44% of its recommendations are so far beating the market. Hardly impressive.

Stick to banking, Goldman
More important than its overall record, though, are the industries in which Goldman is going astray. Did you notice, for example, that two of the firms where Goldman is already going awry, Accenture and General Electric, both operate in the defense industry? Yet now we're supposed to run, not walk, to our broker and sell shares of Lockheed Martin on Goldman's say-so.

I don't think so.

Fools, it's entirely possible that Goldman's right on this one in the short term. In the short term, anything can happen -- up to and including "major challenges" to the JSX program in 2010. But the thing you must remember is that JSX is not a one-year program. It's a 60-year program. One expected to generate upwards of $1 trillion (yes, that's right -- with a "T") in revenue for Lockheed. And remember that this is just one program out of the many, many revenue streams that all flow Lockheed-wards. Simply put, Lockheed has a lot of arrows in its quiver, any one of which could skewer Goldman's sell thesis.

Buy the numbers
With a stock selling for barely 10 times annual earnings, 9% projected five-year growth (and a historical record of growing earnings at nearly 22% per year over the last five years), Lockheed looks to offer investors a sizeable margin of safety today. Meanwhile, ample free cash flow more than supports the firm's reported earnings under GAAP (in fact, such free cash flow outweigh "accounting profits" $3.8 billion to $3 billion), while net debt is a modest $1.1 billion for this $30 billion stock.

All of which leaves me decidedly unconvinced by Goldman's "convincing sell" rating today. To the contrary, I'm pretty darn sure that for long-term investors at least, Lockheed Martin should soar.

Accenture is a Motley Fool Inside Value recommendation. The Fool has a financial position in Oracle. Fool contributor Rich Smith has no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 1389 out of more than 145,000 members. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (14)

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.

  • Report this Comment On January 07, 2010, at 12:44 PM, Demoncrat wrote:

    Lockheed is a sell, but not for the reasons relied on by Goldman or even mentioned in this article. Every decade or so, Lockheed dips as the US DOD re-evaluates its strategic objectives and Lockheed is forced to delay its response. We're looking at another shift now as US policy moves less conventional under Obama and the US budget limits some of the international defense aid that traditionally bolster's the bottom line of LMT. That said, if your under the age of 50 and can wait, Lockheed will reward you after the dip with 20% per year, and more than beat the market over the next 10.

    If you need Defense exposure in your portfolio, consider Honeywell (HON) where their defense divisions are more nimble and more able to quickly react to the changing climate. Additionally, it's myriad of consumer products, specifically energy related components, insulates almost as well as defense in case we see the first double dip in history.

  • Report this Comment On January 07, 2010, at 1:39 PM, bishopchairman wrote:

    Goldman is right on the demise of the JSF. Lockeed will never see production of the JSF of more than a few hundred. An Air Force insider and several credible consultants told me this at the time that Lockheed won the JSF contract. Their advise was to invest in Boeing while it is down because Boeing was the leader in unmanned aircraft and commercial at the time. They did not expect so see a manned aircraft in production passed 2020 and maybe before.

    I agree with the earlier post and with MF that Lockheed is a good long-term, but likely to not have a good year on the Miliary front in 2010 for all of the reasons mentioned.

    Lockheed hit bottom in March 2008 at $57 and change. Currently at $73. I think bottom is too uncertain to try to guess. I will start adding shares when it gets closer to $60 unless it is dropping quickly at which point I will wait for a while.

  • Report this Comment On January 07, 2010, at 3:55 PM, BTN100 wrote:

    Not that I'm a fan of Goldman, but talk about the pot calling the pot kettle black: The 2 three-star Motley Fool CAPS stocks outperformed the 4 four-star CAPS stocks. Looking at this selection, while GS was 2 for 6, CAPS was 0 for 4.

    In regards to Lockheed Martin's "60-year" program: check your facts. The article only says 20-years, and that is based on highly optimistic purchase rates.

    Besides heavily plugging their services at the end of EVERY article, the bigger problem is that MF is always way too bullish and stock-centric. Long-stock portfolios have very little defense in bear markets.

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