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
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 Briefing.com 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:
|
Companies |
Goldman Says |
CAPS Says |
Goldman's Picks Beating S&P By |
|---|---|---|---|
|
Wells Fargo |
Outperform |
*** |
2 points |
|
Bank of America |
Outperform |
*** |
4 points |
On the other hand, however, Goldman is also racking up a surprising assortment of losers in its portfolio:
|
Companies |
Goldman Says |
CAPS Says |
Goldman's Picks Lagging S&P By |
|---|---|---|---|
|
General Electric |
Outperform |
**** |
5 points |
|
Potash |
Outperform |
**** |
1 points |
|
Accenture |
Outperform |
**** |
2 points |
|
Oracle |
Outperform |
**** |
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.
