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. But 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.
"So long, and thanks for all the fish."
In Douglas Adams' Hitchhiker's Guide to the Galaxy series, readers learn that just before Earth was destroyed, the dolphins sent mankind a parting note before departing our planet for others in less danger of imminent vaporization: "So long, and thanks for all the fish." This morning, RBC Capital sent a similar note to investing mogul Carl Ichan, in the form of a downgrade for Clorox
As you've probably heard by now, Icahn has offered to buy Clorox -- first sending the board a $76.50 offer for the company's shares and, when that was rejected, upping his bid to $80 yesterday. According to Icahn, there are at least two attractive outcomes here. On one hand, he may succeed in buying the company, rewarding shareholders with a buyout premium and then working his vulture-investor magic to strip off and sell the company's less desirable parts, revealing the tasty, profitable caramel core at the center -- which he would then keep for himself. Alternatively, Icahn suggests that his bid may elicit interest from the likes of Procter & Gamble
So far, none of these companies has expressed any interest whatsoever. On Monday, I argued that there will be no counteroffers forthcoming -- and it seems RBC agrees with me. After crunching the numbers, and taking into account the 9% gain Clorox has booked over the past 3.5 days of trading, RBC is downgrading Clorox to "market perform" and moving on in search of better bargains.
Let's go to the tape
Is that the right move -- for RBC, and for you, if you're a Clorox shareholder? Obviously, I think so. I told you on Monday why I think Clorox costs too much at today's $75 price tag, and why it would be even more irrationally exuberant to expect the shares to reach $100. But before you take my word for it, consider the record of the analyst who's now backing my theory: RBC.
According to our CAPS stats, RBC is a fine analyst in many respects and outperforms 95% of the investors we track on CAPS across the length and breadth of its many, many stock picks. There's just one problem with its record, though: RBC does an absolutely miserable job of picking winners in the Household Products industry. Out of five recommendations made over the past few years, RBC's currently beating the market on just two of 'em -- and neither one is named "Clorox":
RBC's Picks Beating (Lagging) S&P by
Church & Dwight
I have to say, I'm not best pleased to find myself now in company with RBC. So far, this analyst's track record in Household Products resembles nothing so much as a trail of muddy footprints across a freshly vacuumed rug. Call me a cynic, but I wonder whether RBC is really downgrading Clorox because it lacks confidence in the potential for a buyout. I suspect that RBC is instead using the Icahn bump as a chance to exit a losing position with some dignity.
Be that as it may, I have no particular axe to grind here. I've never recommended Clorox before. To the contrary, I thought the company's decision to acquire Burt's Bees a few years back was a silly mistake and a bad fit for the Baron of Bleach -- and I said as much. As for today, I'm sticking with my original analysis: Clorox's amalgamation of brands, each outstanding on its own, makes little sense in their current configuration.
If Icahn can spur management to make him go away by selling off the company's food brands to Smucker, for example, and its personal-care businesses to P&G -- great. I think a rationalization of the brands would unlock value at Clorox, and that would be good news for today's shareholders. As for the idea that some white knight will ride forth to buy Clorox for $100 a share, though -- well that is still just a pipe dream.
If you were thinking about buying the stock for this reason, then take my advice, and RBC's: Don't.