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." While the pinstripe-and-wingtip crowd is entitled to its opinions, 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.)
Given this, 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.
Today, we're going to take a look at three high-profile ratings moves on Wall Street: An upgrade for MGM Resorts
MGM's new rating: neutral
Last week, Motley Fool Blog Network contributor Robert Fisher (who I hear also plays a mean game of chess in addition to picking stocks) took a close look at MGM and concluded that with a debt load twice its own market cap, the stock posed "an unnecessary degree of risk." Be that as it may, this morning investment banker Credit Suisse decided that MGM has improved enough that it's no longer willing to bet against the stock. Removing its underperform rating, CS upgraded MGM to neutral.
What can I say? I'm inclined to agree with both analysts. On the one hand, while not quite as profitable as its income statement suggests, MGM is now generating $350 million in annual free cash flow. Continued improvement could enable MGM to get its debt under control and keep the firm viable. That said, Robert is right about there being better alternatives. Personally, I prefer MGM rival Wynn Resorts
Cheniere Energy's new rating: buy
Even as it canceled its short bet on MGM, Credit Suisse replaced it with a risky gamble on liquid natural gas exporter Cheniere Energy. Credit Suisse seems to think the U.S. natural gas boom is a trend with some legs, and believes Cheniere is just the company to profit from it.
Here, though, I have to disagree. Like MGM, Cheniere has a heaping helping of debt on its plate -- $2.8 billion net of cash on hand, and more than three times its own market cap. Unlike MGM, Cheniere has yet to prove it can pay down this debt. The company's still burning cash like mad, and the company needs to spend upward of $7 billion to complete its various infrastructure projects. Maybe they'll succeed -- but from my Foolish perspective, this stock's simply too risky, its prospects too uncertain, to justify anything but the most speculative bet by an individual investor.
Cree's new rating: Buy? Neutral? Sector perform? Take your pick.
Last but not least, we find Wall Street going simply haywire in response to Cree's earnings report. On the one hand, the LED lighting pioneer missed analyst estimates for both revenues and earnings, with margins dropping "across the board." On the other hand, Fool analyst Seth Jayson points out that revenues at the company expanded "significantly," coming in 18% stronger than in the prior year's fiscal second quarter.
In response to the miss, analysts at Ticonderoga and Pacific Crest both rolled back their buy ratings on the stock, downgrading Cree to the equivalent of a hold rating. ThinkEquity, in contrast, upgraded the shares to buy, while Jefferies & Co. reiterated its buy rating, arguing that after a tough 2011, Cree is poised to benefit from "pent up" demand and LED lighting subsidies from China.
Here, I'm more inclined to side with the bulls. While most analysts focus on GAAP revenues and earnings, I prefer to judge a company by the content of its cash flow statement, and here, Cree is starting to look like it's turned a corner. Free cash for the fiscal first half was quadrupled what Cree made in last year's H1. Run-rating out the company's $61.2 million H1 performance out, I see Cree generating perhaps $122 million this year, for a price-to-free-cash-flow ratio of just under 23.
Foolish final thought
That said, I still believe LED investors are better off investing in a steady, well-capitalized industrial behemoth like General Electric
Who should you believe -- me, or the "professional" analysts? Check out Motley Fool CAPS, and see how the quality of my advice stacks up against theirs. Thanks to CAPS, now you can decide for yourself.
