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. With a little help from our Motley Fool CAPS supercomputer, we help you to track the long-term performance of Wall Street's best and worst.
Investing in a brave new world
It's just a little more than a week before we flip over to a New Year, and to my Foolish eye, it looks like the stockpickers at JMP Securities are wasting no time preparing for it. This broker has initiated coverage of a raft of new-energy plays for 2012.
Granted, some of these ideas JMP feels only lukewarm about. Nat-gas-for-cars advocate Clean Energy Fuels (Nasdaq: CLNE ) , for example, got only a "market perform" rating out of JMP. But JMP's much more hot and bothered about its other ideas, assigning outperform ratings to the majority of its new ideas, including names such as:
- Capstone Turbine (Nasdaq: CPST ) , a manufacturer of microturbines for generation of both heat and cooling.
- Johnson Controls (NYSE: JCI ) , primarily an auto-parts maker, but also a rising force in the market for rechargeable batteries used in electric cars.
- Orion Energy Systems, which has developed a whole portfolio of energy-management devices.
- AndWestport Innovations (Nasdaq: WPRT ) , which has developed new tech for converting cars, trucks, and buses to the use of natural gas and other alternative fuels.
Let's go to the tape
As I mentioned, JMP likes all of these companies a lot. There's just one problem -- so far as I can tell, JMP has yet to meet an alt-energy stock it doesn't like. Reviewing the analyst's performance as scored by our CAPS supercomputer, it quickly becomes apparent that JMP is an alt-energy aficionado -- but not a particularly successful one.
Indeed, over four years and multiple stock picks in the in the Electrical Equipment industry, it seems JMP has rated every stock it's encountered an "outperform." Or at least a "market perform," which ratings we don't track. In any event, there's no evidence that it has recommended selling any of them. But how has that worked out for JMP so far?
(out of 5)
JMP's Picks Lagging S&P by
Source: Motley Fool CAPS.
I'll tell you how it's worked out. With the sole exception of a 2007 endorsement of Roper Industries, which performed quite well, every other recommendation JMP's made in this space has been uniformly optimistic -- and uniformly wrong. SunPower (Nasdaq: SPWR ) to outperform the S&P 500? Wrong. A123 (Nasdaq: AONE ) ? Wrong. Ener1? So wrong.
And now JMP is back again, telling us to invest in four more bright ideas. I almost hesitate to ask, but is there any reason to listen to it?
I'd love to be able to tell you that JMP's latest batch of recommendations will help this analyst turn the corner, but I fear that history will more likely repeat itself.
Why is that? Because although I admit that on the surface there seems some promise in these stocks -- Johnson Controls, for example, looks interesting at 13 times earnings and a 17% projected growth rate, while Orion boasts a cash-rich balance sheet and surprisingly strong growth prospects of 35% to offset its loftier P/E near 50 -- the simple fact is that none of these companies is currently seeing any real free cash flow at all from its business.
P/Es aside, even the stocks with attractive GAAP profits (Westport and Capstone don't even have that) are found to be burning cash on their cash-flow statements. At tiny Orion, $2.2 million in negative free cash flow. At Capstone, $21 million burned over the past year. At Westport, $59 million. At Johnson Controls, nearly a quarter billion.
I don't know about you, and I don't know about JMP Securities, but when I invest my hard-earned cash, I prefer to put it in the hands of companies that have proved that they, too, are in the business of generating cash, as opposed to burning it. Of these four JMP endorsements, Johnson Controls is the closest to meeting that criterion, as it's historically been a pretty good free cash flow producer.
If 2011 turns out to have been just an off year for Johnson, that pick could still work out for patient investors. As for the rest of 'em, though, I wouldn't hold my breath ... and I wouldn't follow JMP's advice.
The good news is that you don't need to invest in unprofitable, cash-burning alt-energy plays to make money in the energy industry. You can do that with good old-fashioned hydrocarbons. Want to learn how? Read the Fool's new -- and free! -- report on three stocks to buy for $100 oil.