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 three high-profile ratings moves on Wall Street: A really big buy rating for Alcatel-Lucent (NYSE: ALU  ) , a surprising upgrade for Bank of America (NYSE: BAC  ) , and a downgrade for General Dynamics (NYSE: GD  ) .

Raymond James calling. Will you accept the profits?
There's big news in the telecom equipment industry this morning. On Wednesday, analysts at broker Raymond James announced a series of new ratings in the industry: F5 Networks (Nasdaq: FFIV  ) , with a price-to-earnings ratio of 40, got tagged with a mere "market perform" rating. Yet the analyst graced similarly valued Finisar (Nasdaq: FNSR  ) with an "outperform" and, in the biggest news of the day, anointed Alcatel-Lucent with its highest rating: "Strong buy."

When you consider that Alcatel's P/E currently sits at a lowly 5.6 -- substantially less than the valuations accorded to F5 and Finisar -- Raymond's enthusiasm for the stock is understandable. But is Alcatel really as cheap as it looks?

After all, despite its $1.4 billion in profits last year, the company continued burning cash in 2011 -- as it has done every year for the past five years. Last quarter, however, Alcatel showed it at least has a chance of doing things differently in 2012. Free cash flow for last year's fiscal fourth quarter came to a lofty $786 million. And while this is still not as good as what Alcatel is claiming on its income statement, it's a darned sight better than anything we've seen on the cash-production front in the past year and a 52% increase from the amount of cash Alcatel generated in the previous year's fourth quarter.

It's too early to call this a trend just yet, but it just may be a glimmer of light at the end of Alcatel's long, dark, money-eating tunnel. If and when Alcatel manages to repeat the feat in Q1 2012, I just may be inclined to follow Raymond James' lead and recommend Alcatel myself. For the time being, though, I remain a skeptic, and I have rated Alcatel an underperform on Motley Fool CAPS. How's that CAPScall working out for me? See for yourself.

Bank on America?
In further "good" news, after climbing strongly for much of the year, B of A has shed about $1 a share since mid-March. Not all investors are thrilled at the sudden snapback, but over at Guggenheim, the analysts are cheering -- and urging investors to take advantage of the new and improved price to jump back into the stock.

While most analysts think Bank of America will claim about $0.12 per share in profits when it reports earnings next week, Guggenheim thinks the bank will do much better and posits a $0.20-per-share profit -- currently the most optimistic prediction on Wall Street. Guggenheim argues that B of A reaped big profits from a wave of mortgage refinancings this past quarter, which will boost earnings at its mortgage banking business. What's more, even if it turns out Guggenheim is wrong about the exact earnings number, the analyst says it will still be right about the big picture. Considering all the pessimism surrounding B of A these days, Guggenheim says even "reasonably good" results next week could spark a new rally in the shares.

Me? I'm not so sure. Consider: In last year's first quarter, B of A earned $0.17 per share. If the bank can earn this much again in Q1 2012, it will still be stuck with a triple-digit P/E ratio (currently 886 times earnings -- or, the immediate stock price divided by the single penny in trailing earnings that B of A possesses). In my mind, the only way B of A sidesteps this stigma is by proving Guggenheim right and earning something close to the analyst's predicted $0.20. Want to bet that this single analyst is smarter than everybody else on the Street? Neither do I.

A more defensible idea
Last but not least: General Dynamics. If you ask me, our featured downgrade, General D, offers more upside than either Alcatel or Bank of America. Sure, everyone knows defense companies are having a hard time of things, what with America's budget cuts and all. (Well, almost everyone. Judging from its late-in-the-game downgrade this morning, it appears investment bank Lazard only recently got the memo.)

But the good news is that this widespread pessimism has cut General Dynamic's stock price down to very attractive levels. Selling for $69 and change this morning, the stock is priced at barely 10 times trailing earnings. Yet the General is expected to grow these earnings at nearly 9% per year over the next five years, and it already generates free cash flow that's about 9% better than what it reports as GAAP net income. Top it all off with a dividend yield that approaches 3%, and I think you've got a great company selling for a good price. Pick up a few shares for yourself today -- and don't forget to send Lazard a thank-you note for helping to keep the stock cheap for you.

Whose advice should you take -- mine, or that of "professional" analysts like Raymond James, Guggenheim, and Lazard? 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, nor is he short, any company mentioned 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. 350 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. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 11, 2012, at 7:30 PM, PSUPETE84 wrote:

    With regard to the BoA analyst, it would not be hard for him to be smarter than all the other analysts because, as a professional group, they are not the brightest bulbs in the box. Who needs a sell recommendation after earnings are released and they missed estimates. Or a buy recommendation after an earnings beat. I give this guy a lot of credit - right or wrong. At least if you buy based on his analysis and he is right you can make some money. IMHO, most of these guys and their research in are worthless!

  • Report this Comment On May 06, 2012, at 9:14 PM, BlackMomba321 wrote:

    Finisar FNSR was rated outperform by Raymond James - Morgan Keegan, as well as buy ratings Ford Equity Research, Stifel Nicholas and Citigroup. THEY CAN'T ALL BE WRONG!

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