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've got 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 in the energy sphere: A downgrade on Chesapeake Energy (NYSE: CHK ) , followed by a price target tweak on American Superconductor (Nasdaq: AMSC ) and a bona fide upgrade for Capstone Turbine (Nasdaq: CPST ) . Let's dive right in.
Chesapeake: All washed up?
We'll get the bad news out of the way first. This morning, the analysts at FBR Capital revoked their "outperform" rating on Chesapeake Energy (and fellow nat-gas plays PetroQuest (NYSE: PQ ) and Devon Energy (NYSE: DVN ) , too), downgrading all three stocks to "market perform."
You don't have to look far to find the reason. After a long and brutally warm winter, natural gas is selling for the low, low price of $2.50 per million Btus. Moreover, with more and more supply coming on line from America's multiple shale gas projects, and storage capacity near to overflowing, there's a clear trend in nat-gas pricing today. (Hint: You can see it here.) This gives little reason to hope that profits at any of these three natural gas specialists will perk up any time soon.
Mind you, FBR still thinks it's safe to hold on to your Chesapeake shares. And at 11 times earnings, and 11% long-term growth, I suppose some investors would say the shares are only fairly priced.
But me, I'm not so sure. My biggest problem with Chesapeake isn't with its GAAP profits, but with its actual free cash flow, which has long been of the negative variety. Chesapeake burned $10.3 billion in cash over the last year, compounding the problems posed by its $11.7 billion in net debt. If push came to shove, I'd be more inclined to sell Chesapeake than to buy it.
American Superconductor: Anybody know a good electrician?
Speaking of cash-burning businesses... American Super has burned cash in every year but one, for the past 15 years. (And maybe longer. I admit that the red ink started to blur together after a while, and I stopped searching.) Last year was its worst on record, as the company plunged into a sea of red ink nearly $160 million deep, and recorded a $300 million GAAP loss, to boot.
And yet, just yesterday, American Super surprised investors with a report of higher revenues and lower losses than Wall Street had expected. The news was good enough to win some love from Ardour Capital, which, while keeping the stock at "hold," did at least boost its price target -- up 22%, to $5.50 per share.
But is the stock really worth that much? I mean, even American Super's "improved" results show that the company still earns negative gross margins on its product. In illustration of which, the main reason the company lost less money was because revenues dropped. Quite literally, the more stuff American Superconductor sells, the more money it loses.
It gets a Fool to thinking: If only American Superconductor would promise to go out of business immediately, net losses would drop dramatically. Imagine how high the stock would fly on that news!
Capstone's coup: Winning an upgrade
As much as Ardour likes American Super, it loves tiny microturbine-builder Capstone Turbine. Citing cost reductions and price hikes evident in yesterday's earnings report, Ardour upgraded shares of Capstone to "buy" this morning, and slapped a $2 price target on the stock.
Not everyone's as impressed. This stock is unprofitable for the past-12-month period, is expected to lose $0.09 per share this year, and sells for 130 times the amount of profit it might (or might not) earn two years from now.
My advice: If you think it's reasonable to pay 130 times earnings that -- if they happen -- won't happen until two years from now, follow Ardour's advice and buy the stock. If you don't, don't.
Whose advice should you take -- mine, or that of "professional" analysts like FBR and Ardour? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
And if you're looking for a more reliable way to make money in the energy sector, read the Fool's new -- and free -- report on the industry: "3 Stocks for $100 Oil."