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.
So 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.
Double trouble for BHP Billiton
I have bad news, worse news, and pretty good news for BHP Billiton (NYSE: BHP ) shareholders today. Bad news first, you say? OK. On Friday, French banking magnate Societe General downgraded your stock to "hold."
Worse news: So did Britain's HSBC Securities.
And now the good news: Investors totally blew off the bad news and the worse news and bid up the stock price anyway.
The best news of all? They were right to do so.
Let's go to the tape
Why were investors right to ignore the recommendations of two name-brand multinational banks,and buy BHP when the professionals urged them to sit tight? I see at least two good reasons, beginning with the reputations of the bankers concerned. Starting with Societe General, this banker really has no reputation to speak of. It doesn't report ratings through Briefing.com for independent review, so we can't be sure whether SG is worth listening to at all.
Not so with HSBC. This banker actually does report its results through Briefing.com, and as a result, we know for certain ... that HSBC doesn't know what it's talking about. Over the course of five years' study of the HSBC's results, we can tell you that in the majority of cases, when HSBC says a stock will beat the market, it instead does the opposite. Despite making Metals and Mining its top focus in stock-picking (48 recommendations in five years,) HSBC has managed to underperform on 51% of its picks, including ...
|
Company
|
HSBC Rating
|
CAPS Rating
(out of 5)
|
HSBC's Picks Lagging S&P by
|
| Rio Tinto (NYSE: RIO ) |
Outperform |
**** |
3 points (picked twice) |
| Newmont Mining (NYSE: NEM ) |
Outperform |
*** |
13 points (picked thrice) |
| Yamana Gold (NYSE: AUY ) |
Outperform |
**** |
70 points (picked twice) |
And, of course, HSBC has also underperformed on BHP itself, recommending that investors buy the stock back in June of this year, only to see BHP lag the market by a 12 percentage point margin. So in short, if history is any guide, you probably shouldn't let HSBC's advice guide your investing decisions.
Bulls, bears, and BHP Billiton
And mind you, this is not coming from a BHP bull, either. Fact is, whether you look at BHP as more of an aluminum company, a copper producer, or an iron ore miner, I see better alternatives out there. Regular Fool readers know that I'm a confirmed skeptic on Alcoa (NYSE: AA ) for example, but at 11 times earnings and a 37% projected growth rate, that stock looks cheaper to me than BHP. Similarly, I prefer Freeport-McMoRan (NYSE: FCX ) on copper (again, with reservations), while Vale's (NYSE: VALE ) 5 P/E ratio looks positively shiny in iron ore production.
I don't like the fact that BHP generates less free cash flow than it reports as net income, either. Regardless, with free cash flow for last fiscal year tipping the scales at $17.7 billion, I think the resulting 11.3 price-to-free cash flow ratio at BHP makes the stock a buy at 15.6% projected long-term growth -- the more so once you factor BHP's generous 3.6% dividend yield into the mix.
Foolish takeaway
With fears of a new recession looming larger every day, I can't really blame HSBC and Societe General for taking a conservative stance on BHP. But from where I sit, the numbers really don't justify sitting on the sidelines. BHP is cheap. Plus, the thing about economic cycles is that they're cyclical -- meaning, even if I'm wrong, and the bankers are right, eventually what goes down must come back up.
That holds true for economies in general, and BHP Billiton stock in particular.
If you want to learn more about BHP Billiton -- or Alcoa, Freeport, or Vale for that matter -- here's a way to make the job easier on yourself. Follow the links to add each stock to your Fool Watchlist:
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