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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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 …
One of the best mining investors in the business gave a boost to shareholders of Yamana Gold (NYSE: AUY ) this morning. According to the ratings watchers at theflyonthewall.com, HSBC has just upped its rating on Yamana from "neutral" to "overweight." But here's the problem: We haven't a clue why.
Up on Wall Street, you see, there's been a major crackdown on disclosure of analyst ratings to the public. The wesbite itself just won a lawsuit, in which the big brokerage banks attempted to shut down its coverage of their private advice to clients. But it's clear that brokers like HSBC are trying to put a lid on leaks of their advice to run-of-the-mill investors -- and in the case of today's Yamana upgrade, it seems to be working. Judging from the total lack of mention on Yahoo! Finance today, not a single major news outlet has details on the upgrade or even seems to know that it happened.
Let's go to the tape
For individual investors like you and me, this poses a dilemma. We know the upgrade happened -- but we don't know why it happened. Fortunately, thanks to the magic of Motley Fool CAPS, even though I can't tell you precisely what HSBC is thinking about Yamana, I can tell you how well it thinks about these kinds of companies.
And it thinks well of them indeed, with a few exceptions. According to our records, 53% of the banker's publicly announced ratings have beaten the market over time, and HSBC does an even better job when it comes to picking precious-metals miners, getting about 54% of its recs right in this industry.
|
Company
|
HSBC Rating
|
CAPS Rating
(out of 5)
|
HSBC's Picks Beating S&P by
|
| Barrick Gold (NYSE: ABX ) |
Outperform |
*** |
16 points (picked thrice) |
| North American Palladium (NYSE: PAL ) |
Underperform |
**** |
27 points |
| Kinross Gold (NYSE: KGC ) |
Outperform |
*** |
30 points (picked twice) |
That said, no analyst's perfect, and even HSBC has made some notable goofs. In recent years, it has predicted that Freeport-McMoRan (NYSE: FCX ) would first underperform and then outperform the market -- and it's been wrong both times, losing 70 percentage points to the market. It's picked Newmont Mining (NYSE: NEM ) three times in the past five years -- and gotten every single call wrong, costing its clients a combined 32 points' worth of market underperformance on the stock.
Valuation matters
Call me a pessimist, call me a Fool, but I think HSBC's getting it wrong again on Yamana Gold.
Now, I know a lot of Fools will disagree with me on this one. My esteemed Foolish colleague and confirmed gold bug Christopher Barker, for example, remains very bullish on gold and silver stocks in general. But when I look at Yamana in particular, I simply don't see how the stock can continue to outperform the market. The numbers just don't work for me.
Consider: At 18 times earnings, but with a predicted earnings growth rate of less than 8%, Yamana already looks like a pretty pricey stock on the surface. Dig a little deeper, though, and the supports for this stock look weaker still. For example, that 18 P/E ratio is based on the $462 million that Yamana reported earning over the past year, right? But according to the company's cash-flow statement, Yamana managed to turn only about $192 million of those earnings into actual free cash flow. Now, it's not entirely unique in this respect. I note, for example, that Barrick Gold is also generating much less cash from its business than its GAAP financials would suggest, while North American Palladium is burning more cash than even its GAAP income statement lets on. On the other hand, Newmont's free cash flow and net income are pretty closely aligned, while Freeport actually generates much more free cash from its business than meets the eye.
Foolish takeaway
Say what you like about "proven and probable" gold reserves, the long-term decline of the dollar, or gold-buying trends in India -- to me, a company that's operating in as supposedly profitable a sphere as gold-mining is today should be generating much more cash than Yamana is currently showing.
The prospect of paying 44 times the amount of cash the company does generate really doesn't appeal to me. And that's why I won't be following HSBC's advice to buy Yamana today.
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