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.
Canaccord discovers biotech
It's shaping up to be a busy week for investment banker Canaccord Genuity. On Monday, the Canadian banker initiated coverage of more than a dozen various biotech stocks and started covering the retail industry as well. Yesterday, it was telecom's turn, and Canaccord rang up a good 15 names in the telco space.
Good news, you say? There's nothing like free publicity to help out a stock? Not so fast. Because as it turns out, Canaccord has some pretty serious reservations about investing in this industry today. In fact, of the 15 recommendations Canaccord issued Tuesday, the vast majority were hold ratings: Akamai Tech (Nasdaq: AKAM ) ? Hold. Level 3 Communications (NYSE: LVLT ) , perhaps? Nope. Canaccord said to hold that one, too. Sprint Nextel (NYSE: S ) ? AT&T (NYSE: T ) ? Verizon (NYSE: VZ ) ? Hold, hold, and hold some more.
What's Canaccord got against these names?
Level 3 miscommunication
In the equipment space, for example, the analyst warns that investors are making a mistake in thinking that "LVLT is once again on the cusp of a material improvement in operations that will result in accelerated revenue growth, sustainable margin improvements or multiple expansion." To the contrary, argues Canaccord, "For more than a decade, investors have mistakenly held the belief that fundamental improvements, largely through acquisition, would lead to dramatic improvements in the company's FCF generation. ... We believe 2012 will likely be a carbon copy of the past decade." To wit, continued cash burn, rising debt, and disappointing returns. (Hint: Run away.)
At Akamai, the picture's not quite so grim. Unlike Level 3, this one's a consistent cash generator. The problem here is that "data center costs are soaring, which is increasingly reflected in margin pressures." Priced at 35 times earnings today, Akamai's simply too expensive for the 14% long-term growth Wall Street has it pegged for.
The big three
The analyst's not much more optimistic about these companies' customers, either. Sure, "overall wireless trends have been strong, but increasing promotional activity will likely limit margin recovery" at AT&T and Verizon. The analyst further warns that a strengthening economy and more aggressive investors will tend to divert investor attention from "defensive," generous dividend payers such as AT&T and Verizon. As the analyst opines: "We continue to remain cautious on the two large names, expecting negative fund flows with an improving market."
And as for Sprint... well, I'll just let the write-up that StreetInsider.com prepared on this one speak for itself: "We continue to believe that Sprint is a structurally impaired company attempting to spend its way out of its problems." (Gee, don't sugarcoat it, Canaccord. Tell us what you really think!)
No hope anywhere
Who does Canaccord like? This shouldn't come as a surprise, given the comments up above about the "strong" trends in wireless, but some of Canaccord's kindest words are reserved for the three major cellphone tower plays -- American Tower, Crown Castle, and SBA Communications. Canaccord's looking for dividend hikes at American Tower attracting more investors to the stock, and believes we'll see the valuations at Crown Castle and SBA gradually "converge" with a rising American Tower -- in short, it sees all three stocks going up.
My worry? At valuations of 63 times earnings for American Tower, 103 times for Crown Castle, and infinity for the unprofitable SBA, I'm not convinced there's much more room for these valuations to rise. Even trees can grow to the sky -- and cellphone towers are more expensive to build than trees.
Sad to say, I'm pretty much in agreement with Canaccord's opinion of the telecom equipment makers and the major telcos alike. Meanwhile, I'm less sanguine than this analyst about the prospects for continued outperformance in the cellphone tower industry. And I'm matching actions to words. Over the next few weeks, you'll see me tweak my own public ratings on CAPS to reflect this grim view -- I'll be canceling my endorsement of Verizon, for one thing, and doubling down on my underperform rating of Level 3 Communications for another.
Who else will get hit? Follow along and find out.
Like the idea of investing in telecom, but want to maximize your chances of making a profit from the idea? Read the Fool's new free report: "3 Hidden Winners of the iPhone, iPad, and Android Revolution." We're giving away the report free for download today, but it won't be here forever. Click quick, before it's gone.