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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.
After the holiday comes ... the hangover
After a long and, I can only presume, alcohol-drenched weekend, Mr. Market woke up with a killer hangover this morning -- and proceeded to sell everything in sight. As I stared in horror at my ticker feed this morning, the Dow Jones Industrial Average (Index: ^DJI) was down some 250 points.
On the face of it, that seems bad news. But as Jefferies & Co. points out this morning, with bad news can come good buying opportunities. Indeed, this morning, the stockbroker sees a chance to load up on multiple mining stocks on the cheap. At Barrick Gold (NYSE: ABX ) , for example, Jefferies sees an "attractive valuation" of just 14 times earnings, versus the 19 multiple at Kinross Gold (NYSE: KGC ) or the 22 multiple at Goldcorp (NYSE: GG ) (both newly hold-rated). The analyst sees Barrick as more attractive than the similarly P/E'ed Newmont Mining (NYSE: NEM ) , which has "higher costs and a "short reserve life." Jefferies also likes Barrick's "recent accretive expansion in copper mining."
The analyst also likes coal stocks -- big time. At Alpha Natural Resources, Jefferies argues that skepticism as to the future of coal prices is now "fully discounted" in the stock price. Similar skepticism is noted at rivals Arch Coal (NYSE: ACI ) , Peabody Energy (NYSE: BTU ) , and CONSOL Energy. But according to Jefferies, investors are missing the bigger picture here -- the export market for coal. Given the growth potential in markets outside U.S. borders, Jefferies declares that the "bearish outlook ... is unfounded."
"Slow" news day
Curiously, none of these ratings has yet shown up on news aggregator Briefing.com. I only know about them thanks to the diligent efforts of our friends at StreetInsider.com, which clued investors in to the news this morning. (Thanks, guys!) And it's a good thing they did, because these probably aren't ratings we want to ignore.
You see, according to our very own CAPS computer, Jefferies is one of the better-performing analysts in the world. Over the several years we've been monitoring its performance, Jefferies has beat out about 85% of the investors we track. But will its outperformance continue through 2011 and beyond?
Gold or coal for Christmas?
I have to tell you, folks -- from where I sit, Jefferies has every chance of outperforming on these picks. At 14 times earnings, for example, Barrick does look like an outperformer relative to consensus expectations for near 17% growth. I also like the growth numbers I'm seeing at Jefferies' favorite coal companies, which range from 18% for Arch Coal all the way up to 28% at Alpha Natural. Relative to the firms' P/E ratios, these kinds of turbocharged growth rates speak favorably of the stocks' ability to outperform going forward.
That said ... I do have a favorite here, and its identity may surprise you.
The bull case for Arch Coal
At first glance, Peabody and CONSOL appear to be the best bargains going in coal today. Each is far cheaper than profits-laggard Alpha Natural. Each also sports a P/E ratios lower than its expected growth rate (13.5 for Peabody, 22 for CONSOL.) And yes, both generate decent free cash flow.
The problem is that free cash flow at these two companies is only decent, and not nearly as strong as the firms' GAAP earnings might suggest. In fact, Peabody's $447 million in trailing free cash flow, and CONSOL's $259 million, are both roughly half of reported net income, which to my Foolish eye, makes the bull case less compelling for these stocks.
In contrast, investors looking at Arch Coal today and seeing nothing particularly spectacular in an 18% grower selling for 19 times earnings may be missing a real profits powerhouse. According to its cash flow statement, Arch Coal generates nearly three times as much free cash as its income statement lets on -- $502 million over the past 12 months alone. At just $3.9 billion in market cap, this means Arch stock is selling for less than 8 times annual free cash flow -- not bad for a company growing at 18%.
Time to chime in
If you ask me, this makes Arch Coal the single best idea Jefferies put forth on this day of discount stock-shopping. But hey -- this isn't a dictatorship. This is the Fool. If you see a better buying opportunity on Jefferies' buy list today, tell us about it -- on Motley Fool CAPS.