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All Howard Stern, all the time
By now I suspect you've heard the news: Howard Stern says Sirius XM
In response, Wunderlich Securities is downgrading the stock. Recapping Stern's argument that he was "largely responsible for the survival of Sirius, attracting millions of subscribers," Wunderlich worries the stock will not escape this latest controversy unscathed. Precisely how "scathed" it gets is not clear, but Wunderlich suggests that rather than wait to find out, investors should take their money and run. With Sirius shares fetching about $1.70 apiece, the analyst downgraded the stock to "hold," and predicts the shares will actually lose value over the next 12 months. But is the situation really as bad as all that?
Let's go to the tape
Wunderlich thinks so, and considering the analyst's record, perhaps you are worrying, too? If so, you've got grounds. There are few analysts out there in the markets today showing anywhere near Wunderlich's skill in picking media stocks. Fully 80% of its active recommendations in the industry are beating the S&P 500, including both flavors of Sirius-backer Liberty Media
As such, Wunderlich's worries should not be taken lightly, and yet -- perhaps perversely -- that's precisely what I'm about to do.
Fear "fear itself" -- but don't fear controversy
I get that people are nervous about this latest Sirius imbroglio. You might even go so far as to term some of the reactions "shocked." But at the risk of stating the obvious -- that's exactly what Stern is about. Stirring up controversy. Getting people talking about, and tuned into, him. Shocking them.
So while Wunderlich muses that even if Stern's lawsuit ultimately turns out to be "meritless ... SIRI's current stock market valuation likely cannot accommodate the uncertainty engendered by the suit," I tend to take such assertions with a few grains of salt:
Grain No. 1
Sirius doubters may ask: "What happens if Sirius and its star cannot come to an understanding, and Stern stalks off in a huff?" To which I reply: "Not gonna happen." Remember: Stern's allegations relate to stock awards that he claims he was entitled to, but that Sirius stopped delivering to him three years ago. This is not a new dispute. Only a few months ago, Stern re-upped on a contract that many pundits agree nets him perhaps $400 million over the next five years. Stern himself last year described the contract thusly: "My contract is very fair, I'm very pleased."
I ask you: Does this sound like a man so upset he's going to walk out the door?
Grain No. 2
Over the past few weeks, Stern has been stumping around the country, singing Sirius' praises. He's urging listeners to sign up to receive Sirius content streamed through mobile devices manufactured by Apple, Research In Motion, and makers of Google Android-based smartphones such as Motorola Mobility -- aiming not to boost smartphone sales, mind you, but to help further build Sirius' fan-base.
Grain No. 3
I've saved the best for last. Wunderlich worries that Sirius' "stock market valuation" is too high to endure another controversy. I don't. To the contrary, when I look at Sirius today, I don't see the "167 P/E stock" that seems to frighten Wunderlich so. Instead, I see a company that's promising to generate $300 million in free cash flow in 2011. Assuming Sirius delivers on its promise, this will value the company at 22 times FCF, on a stock expected to post 30% annual profit growth over the next five years.
Call me crazy, but that valuation really just plain doesn't scare me. Nor, I might add, does Stern's latest tirade. Call me a Fool, but I'm looking at yesterday's mini-selloff as a buying opportunity.