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This Just In: Upgrades and Downgrades

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.

Dougherty doubles down on OCZ Tech
Earlier this week, the good folks at UBS investment bank set a $34 price target on Intel (Nasdaq: INTC  ) . The reason: According to UBS, Intel is about to remake the laptop computer market with its billion-dollar Ultrabook initiative.

By reducing the cost of computer processors for the ultralight, hard-drive-less PCs, Intel is expected to slash the cost of Ultrabooks by 20% from their current levels, cutting the floor out from under Apple's expensive MacBook Air, and forcing a wholesale shift in the PC market as consumers flock to the new devices -- capturing 40% of all laptop sales globally in 2012.

An ambitious goal, you say? It is. UBS is predicting no less than an entire new "notebook replacement cycle," the first one we've seen since 2009. But if the analyst is right, this could mean great things for companies like SanDisk (Nasdaq: SNDK  ) , Micron (Nasdaq: MU  ) , and OCZ Technology (Nasdaq: OCZ  ) , which build the solid-state drives that are expected to provide memory for ultralight Ultrabooks -- and the storage servers that will facilitate their accessing the Internet.

Pick a winner, any winner
Perhaps reading from the same playbook, yesterday, the analysts at Dougherty & Co. announced that they expect to see OCZ in particular benefit from "hyper-growth" in the SSD market. According to Dougherty, OCZ is now one of the "premier SSD providers" out there, and is protected by "significant barriers to competitive threats" from the likes of SanDisk and Micron. Dougherty believes we will see OCZ shares (currently at $9 and change) hit $13.50 per share before the year is out, giving investors today a shot at a quick 50% profit.

But is Dougherty right about that?

Let's go to the tape
I'll admit the possibility. One of our better CAPS "players," Dougherty ranks in the top 15% of analysts we track on CAPS. It's even (almost) as accurate as a coin flip -- nearly half of the stocks Dougherty recommends actually do end up outperforming the market. (Here: See for yourself.) I just don't think OCZ is going to be one of them.

You down with OCZ?
Why not? Well, let's begin with the obvious: With no trailing profits to its name, it's hard to say OCZ looks like a bargain. As for Dougherty's "hypergrowth" claim, the 10 analysts who track the stock generally agree that OCZ may be able to grow its profits at 20% per year over the next five years. But while a respectable number, I'd hardly call 20% "hyper" anything. In fact, it's below the average rate of growth predicted for this industry (which is greater than 25%). Meanwhile, OCZ still isn't generating free cash flow from its business. Instead, it burned $75 million last year, and hasn't generated any free cash whatsoever since 2007 (and only a couple of million back then).

As far as Dougherty's claim that OCZ is a "premier SSD provider" goes... you'd probably expect that a premier company would produce premier profits -- or at least a profit margin a smidgen superior to what its competitors earn. But not this one.

Instead, OCZ only booked a 19% gross margin last year. That's not bad relative to Micron, I guess. But it's about 25 percentage points lower than what you'll find SanDisk or even STEC grossing -- yet it's the best number OCZ has managed since as far back as 2004.

Foolish takeaway
Dougherty & Co. is not a horrible stock analyst. On the whole, it's probably not too much worse than the average stock picker you'll find on Wall Street. But when Dougherty tells you to sink your hard-earned money into OCZ, it's totally off-base. There's only one direction OCZ is going, folks: down.

In fact, I'm so convinced that this stock is a dog that I'm going to put my reputation on the line and publicly rate it an "underperformer" on Motley Fool CAPS.

Think I'm wrong? Follow along.

On Motley Fool CAPS, Rich's skepticism has served him well, and he's racked up a record of 72% outperformance over the S&P 500. Even so, he doesn't hate all stocks equally. To learn more about one stock Rich likes (at least, more than he likes OCZ Tech), read the Fool's new report on: "The Next Trillion-Dollar Revolution."

Fool contributor Rich Smith owns shares of SanDisk. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 425 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services have recommended buying shares of Apple and Intel, as well as creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (9) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 29, 2012, at 1:19 PM, tqhx wrote:

    So by saying you put your reputation on the line, if youre wrong, does that mean youll stop writing these biased articles? When Dougherty says "entering hyper growth mode" they are not talking about the past quarters which you pick on. In case you missed it, enterprise drives are over 50% margin have just begun implementation phase at a large list of partners.

  • Report this Comment On February 29, 2012, at 1:33 PM, salmonnegro wrote:

    In the last days I have noticed that every time OCZ spikes, the fools publish a new article bashing the stock. Wondering if they own some of the 20 million shorts or are paid by the ones who do. Anyways, bringing into the analysis the 2007 numbers is meaningless. As you should know, the company only entered the market for SSD last year and has moved quite fast. It is true that they did not generate profit in general, but their new SSD segment is strong and growing faster than you acknowledge. They also accumulate significant inventories, so it's not like the money is gone.

  • Report this Comment On February 29, 2012, at 1:52 PM, ddbikessamsara wrote:

    Exactly what IS your reputation and what have you put on the line? All I ever see out of the Motley Fool anymore is a seemingly endless stream of articles that give brief fluff with no backup and NO CONSEQUENCES if they are dead wrong. At least the analysts take the time to visit the company and see what is happening and put serious research into the recommendations. They have REAL reputations they put on the line and their livelihoods are actually tied to those reputations. The Fool just has to keep pumping out drivel every 10 minutes and possibly "fool" someone into actually paying for a subscription.

    SSD's are early in the growth curve as an industry and if someone is actually willing to dig it is very clear that OCZ is a frontrunner in the industry - better positioned than many of their competitors.

  • Report this Comment On February 29, 2012, at 2:05 PM, fhdfhfhfgh wrote:

    Rick, it says a lot about your character and diligence as an analyst if you are willing to put your reputation on the line for an analysis as half-baked as the above.

    In your superficial review of irrelevant historical GAAP data, did you happen to notice the $200M+ of new capital that OCZ raised in the past 12 months? Considering this new capital is at least 2x the size of the company's prior value (in earlier years) clearly there is a new business plan in place. Perhaps your analysis would be better served forward-looking.

    How will the competitive landscape in PCIe shake-out? How competitive is the Sanrad solution? etc. Your analysis' silence on these critical issues demonstrates your lack of understanding here.

  • Report this Comment On February 29, 2012, at 2:43 PM, loudcld wrote:

    The fact that you own Sandisk shares speaks volumes. Have you even done an ounce of forward looking research on OCZ? One thing I don't understand is why you Fool contributors rarely reply to the comments. Oh wait, maybe it is because you haven't done your due diligence.

  • Report this Comment On February 29, 2012, at 3:28 PM, mj3151 wrote:

    Rich, I bet you're going to be really good analyst when you graduate from high school.

  • Report this Comment On February 29, 2012, at 10:21 PM, ludacris1 wrote:

    This is one of the most ill-informed, poorly researched, and biased articles I have ever read. The author clearly shows he lacks basic knowledge of OCZ, the computer industry, and the SSD Market.


    Prior to just over a year ago OCZ was primarily in the DDR business, so comparing their financials from more than a few years ago is not valid. They got out manufacturing DDR at exactly the right time and moved into SSDs. Look at what's happened to the DDR industry and even major manufacturers in Japan the past year. OCZ management displayed amazing foresight that many other companies in the industry lack.

    Increasing inventory or sales staff, or making acquisitions does not mean burning through cash. Yes, these eat at current profits but at the sacrifice for greater future profits. You give no analysis about the benefits of acquiring Indilinx or Sanrand. Do you even know the difference between using a Sandforce controller or one acquired from Indilinx?

    OCZ is the market leader in consumer SSD’s. Look on newegg or any other retailer to see for yourself. While the margins on consumer SSD’s is lower, the worldwide market is huge. Margins from OCZ enterprise sales (which make up most of the sales) are close to 50%.

    Computer Industry:

    You make reference to a complete notebook replacement cycle, but fail to mention that we are on the edge of a complete desktop replacement cycle as well. Intel is releasing new cpu’s in a few months. Many people will be replacing aging dual-core processors this year and adding an SSD with their upgrade.

    SSD Market:

    The SDD market is going to explode in 2012. Have you read previews of OCZ’s Everest2, or seen reviews of the Revo4 Enterprise drive? They blow the competition out of the water. Everest2 will be released about the same time as the new Intel cpu’s, so OCZ is in position to capture that demand.

    Plus the price of NAND has recently dropped making SSD’s more affordable.

    Combine all of these factors with the HDD shortage and you have the makings of a perfect storm for hyper-growth.

    It’s so sad to see a professional analyst fail to see the big picture of a company and industry. Or maybe there’s a reason why Fool has published so many negative OCZ articles.

  • Report this Comment On March 01, 2012, at 3:37 PM, mj3151 wrote:

    I just looked at your TMFDitty picks and am wondering how you qualify for a 99+ ranking. You have 60 active positions dating back to 11/07 and 41 of the 60 are losing to the market. Is it only the closed positions that count toward your ranking? If so, it looks like you're employing a brilliant strategy to keep your ranking high by just never closing any of your losing positions. Why didn't I think of that.

  • Report this Comment On March 02, 2012, at 11:57 AM, TMFDitty wrote:
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