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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
"I am Oz the Great and Powerful. Who are you?"
It was a contest the likes of which we haven't seen since David vs. Goliath. Yesterday, tiny stockpicking upstart Rochdale Securities pulled back the curtain on the great and powerful Goldman Sachs (NYSE: GS ) ... and declared the giant a fraud. Or at least, a company tarred with alleged fraud-dom, worthy of a sell rating.
On Thursday, Rochdale removed its "neutral" rating on Goldman, downgrading the stock to "sell" on fears that the Justice Department's investigation is gaining steam. This week, excerpts from an upcoming May 26 issue of Rolling Stone began filtering out. From them, we learn that Goldman-scourge Matt Taibbi is taking his attack on the company to a whole new level. No longer sugarcoating the Goldman story with allusions to vampire cephalopods, Taibbi now comes right out and calls Goldman a "gross, baldfaced fraud." And he does so smack in the middle of a Senate inquiry into the banker's business practices, which has produced a 650-page report on the company's alleged misdeeds.
The Senate isn't focused entirely on Goldman, of course. It also devotes considerable time to the activities of Countrywide and WaMu (bought out by Bank of America (NYSE: BAC ) and JPMorgan (NYSE: JPM ) , respectively), and Deutsche Bank (NYSE: DB ) as well. But according to Rochdale, the pressure on DOJ to file criminal charges against Goldman in particular is now "building to a high pitch." If and when charges are filed, the risk of Goldman going the way of Arthur Andersen rise dramatically. Rather than take on even a small risk that Goldman could suffer AA's fate, Rochdale urges investors to sell the stock today.
"Do not arouse the wrath of the great and powerful Oz"
Is Rochdale right to risk Goldman's wrath, declaring the emperor soon to be stripped of his clothes? It's hard to be sure. While we used to follow the broker closely, Rochdale hasn't reported a rating publicly through Briefing.com since at least January of last year.
What we do know about the broker is that back when Rochdale was letting investors see what it was up to, it wasn't up to much good. Out of the handful of banks and finance companies we know that Rochdale rated "buys" in the past, most -- including JPMorgan, PacWest Bancorp (Nasdaq: PACW ) , and CompuCredit (Nasdaq: CCRT ) -- are still losing to the market today. One company, United PanAmFinancial, has sunk as far as the Pink Sheets. And while a circa-2006 endorsement of Goldman looks to be above water for Rochdale, we now know that the broker downgraded that rating at some time in the past.
What's behind that curtain?
Personally, I don't discount Rochdale's warning entirely, even despite its record. Goldman does tend to put itself in hot water, litigation-wise and otherwise, with surprising regularity. That said, the company has survived numerous scandals over its 115-year history. I wouldn't want to lay odds on this particular scandal being the one that does Goldman in.
For investors who do heed Rochdale's warning, however, and argue that if it's safe to sell the stock, it's also safe to short it: Beware. Goldman today costs just 10.6 times earnings, yet most analysts expect it to grow those earnings faster than 11% per year over the next five years. Value investors will tell you that the resulting PEG ratio of less than 1.0 makes the company "cheap," and perhaps too risky to short. Also, if you do short the stock, keep in mind that you'll be on the hook for paying the stock's 0.9% annual dividend while you wait for your pessimism to prove out.
As with so many things in life, you pays your money, you takes your chances.