This Just In: Upgrades and Downgrades

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.

Speaking of steel
The largest steelmaker in the world, ArcelorMittal (NYSE: MT  ) , just reported a fourth-quarter loss. German steelmaker ThyssenKrupp just forecast a loss for its U.S. operations. AK Steel (NYSE: AKS  ) and Nucor (NYSE: NUE  ) have been forced to raise prices on their products to combat rising commodities costs that are eating into profit margins. So naturally, in response to all this "good" news, what did Goldman Sachs do yesterday but upgrade shares of U.S. Steel (NYSE: X  ) .

According to Goldman, you see, U.S. Steel has a couple of advantages over some rivals. For one thing, with $17.4 billion in annual sales, U.S. Steel has several times the scale of smaller fry like Steel Dynamics (Nasdaq: STLD  ) or AK Steel. It's even bigger than Nucor, if only just. This, says Goldman, gives U.S. Steel "leverage" to profit from rising steel prices and rising demand for steel.

Also, U.S. Steel is insulated somewhat from the rising costs of commodity steel ingredients. It boasts "vertical integration into iron ore," and possesses an "attractive priced coking coal contract for 2011 in the US." In this regard, the company is about the closest thing America possesses to Russia's one-stop shopping at coal/iron/power/steel producer Mechel OAO (NYSE: MTL  ) . Goldman says these advantages will turn out to be "strong earnings drivers for 2Q and 3Q." The analyst predicts U.S. Steel will end this year earning $3.50 per share, then go on to earn $6 in 2012, before topping out around $6.25 per share in 2013.

Considering that U.S. Steel shares currently trade for barely 10 times that last number, Goldman thinks now's the time to buy the company, before its full, cyclical-top earnings power becomes apparent. But is Goldman right?

Let's go to the tape
Your first reaction upon hearing about the upgrade might be to say: "Hey, Goldman was right about $100-a-barrel oil. Who knows commodities better than Goldman?"

And yes, Goldman did correctly call the oil curve at $100. But they also told us oil would super-spike to $200 a barrel. (It didn't.) And that's not the only thing Goldman's been wrong on. Turns out, if you look closely at its record, Goldman's muffed many a metals pick as well:

Company

 

Goldman Said

CAPS Rating
(out of 5)

Goldman's Picks Beating (Lagging) S&P by

Freeport-McMoran Copper Outperform **** 2 points (picked twice)
Nucor Outperform ***** (15 points)
AK Steel Underperform *** (32 points) (picked thrice)

Fact is, only 33% of the 18 separate stock recommendations Goldman has made in the metals and mining industry over the past year or so have actually beaten the market's returns. That's right, folks -- when it comes to making "steel" picks, this analyst is actually wrong twice as often as it is right.

D'oh!
Indeed, Homer. D'oh. And the stock's 3% share price pop yesterday notwithstanding, I'm pretty sure Goldman is wrong about U.S. Steel again this week.

Consider the numbers. Right now, the company hasn't a penny of profit to play with. To the contrary, it lost $1.4 billion in 2009, followed by a $482 million loss in 2010. While that may sound like an improvement, in fact, U.S. Steel managed to burn more cash in 2010 than it did in 2009, as free cash flow dove to well in excess of negative $1 billion. Call me crazy, call me a Fool -- but these just aren't the kind of numbers that appeal to me.

Foolish final thought
Even if I'm wrong, though, and even if Goldman is dead on the money with its estimate of $6.25 per share in fiscal 2013 profit, would that make U.S. Steel a buy? Remember, at today's share price that would mean the stock is selling for 10 times those 2013 earnings today. This, in an industry that even optimistic analysts say will show overall growth of no more than 5% over the next five years.

So here's how the math works, to my Foolish eye: Take an overpriced U.S. Steel stock and multiply by an analyst with only 33% accuracy in picking winning steel stocks. Chance of making a profit on this recommendation? Zero.

Nucor is a Motley Fool Stock Advisor recommendation and The Fool owns shares of Nucor, but Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 648 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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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 February 21, 2011, at 10:33 PM, flabanker wrote:

    Just so you know I checked in with Fidelity Investments and their research of X listed twelve independent analysts of X with Goldman Sachs being the second highest rated. Their Starmine Accuracy Score is 76 and here is what Fidelity says about Starmine:

    StarMine is one of the largest and most trusted sources of objective equity research performance scores.

    The StarMine Accuracy Score indicates the relative historical accuracy of analyst recommendations. The score is designed to help you determine whose recommendations may be worth taking into consideration while you are researching equity investments.

    StarMine compares a firm's sector recommendation performance with that of its peers for the last 24 months. Accuracy Scores range from 1 to 100, with 50 representing the median performance of a firm within the sector. "Most Accurate" firms have a ranking of 68 or above.

    Obviously your research is done to fit your conclusion. Very sloppy Mr. Fish and very un"foolish" Moreover, it lends me to believe i should not be taking your very biased opinion on X.

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