This Just In: More 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." 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 several high-profile ratings moves on Wall Street: upgrades for oil tankers Frontline (NYSE: FRO  ) and Teekay Tankers (NYSE: TNK  ) , plus target price hikes at Lennar (NYSE: LEN  ) and General Electric (NYSE: GE  ) . Let's dive right in.

Clear sailing ahead
First up, oil-stock aficionado Dahlman Rose tapped its knowledge of the production industry to pick a few winners in oil transport this morning. Specifically, the analyst removed its sell rating on Overseas Shipholding (NYSE: OSG  ) , and upped its ratings on Frontline, Teekay, and Tsakos Navigation to "buy."

According to Dahlman, there's been a shift in the risk/reward ratios for all four of these stocks. Citing the "fundamental recovery" in oil prices of late, the analyst thinks we'll see tanker rates remain high -- and tanker shares go higher.

With shares of all four shippers down significantly over the past 12 months, a rebound sounds reasonable at some point. But before you run out and follow Dahlman's advice, consider this: All four of these companies are currently operating in the red. They're unprofitable over the past 12 months and, Dahlman's enthusiasm notwithstanding, most analysts expect them to remain unprofitable through at least 2013. So far, Dahlman's got one of the worst records on Wall Street, with more than 60% of its recommendations underperforming the market. Do you really want to bet your hard-earned money on the hope that this time Dahlman's getting it right?

Lennar's no loser
In stark contrast to the performance of oil tanker shares, homebuilder Lennar has been on a tear these past 12 months, gaining 40% in a market where single-digit returns have been the norm. This morning, it got a belated reward for this performance, in the form of MKM Partners' upping its price target 11%.

Is this your cue to buy? Not necessarily. For one thing, Lennar's 50% rally suggests that all the easy money has already been made on this stock. For another thing, MKM's new $29 price target suggests there's only another 4% worth of profit left in the stock. You can get the same amount, guaranteed, just by buying one good dividend payer.

In contrast, buying a share of Lennar requires paying 57 times earnings for the privilege of owning a heavily indebted homebuilder in a cyclical industry. Even MKM doesn't think that's such a great idea. Even as it raised its price target, MKM held its recommendation on the stock at "neutral." I agree.

Saving the best for last
Last but not least, we come to General Electric and the $24 price target that Oppenheimer just gave it. Claiming that the economy is in the midst of a cyclical recovery, the analyst argued this will give GE's earnings a boost. Oppy recommends buying this $20 stock and riding it to a 20% profit over the coming year.

But actually, the story here is even better than that. In addition to a bargain stock price, GE pays its shareholders a tidy 3.4% dividend yield, making the potential profits that much fatter. Plus, as I've argued in the past, GE's copious cash flows, combined with its CEO's commitment to returning dividends to more "normal" levels, suggest GE could easily raise its dividend to 4.6% or more within the next year or so.

On Motley Fool CAPS, I've recommended GE as a likely outperformer of the market and have been proved right so far. I reiterate my support for the stock today: GE's a buy.

Whose advice should you take -- mine, or that of "professional" analysts like Dahlman Rose, MKM, and Oppenheimer? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith does not own shares of any company named above. He does, however, have public recommendations available on more than 50 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle "TMFDitty" -- and is currently ranked No. 381 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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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 March 28, 2012, at 6:26 PM, paultaut wrote:

    While the latest "upgrade" may not suit you. Wells Fargo Upgraded TNK to "outperform" in the middle of February.

    Then the Company, itself, issued a statement on March 16th which included the following:

    "We follow pretty closely to the tanker market. This quarter rates in general have been up, and so we expect our rates to go up as well ... we expect this quarter to be better than the first quarter last year," Teekay Tankers CEO Bruce Chan said.

    The company had reported a profit of 12 cents per share and sales of $31.7 million in the first quarter last year. For the current quarter, analysts are expecting a profit of 4 cents, on revenue of $31.4 million, according to Thomson Reuters I/B/E/S."

    My suggestion is that you research before posting.

    IMHO, the entire sector is regaining popularity. TNK is just one.

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