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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So 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 looking at a batch of positive news the Street: upgrades for Keryx Pharmaceuticals (Nasdaq: KERX  ) and JDS Uniphase (Nasdaq: JDSU  ) , plus a couple of brand new buy ratings for gunsmiths Sturm, Ruger (NYSE: RGR  ) and Smith & Wesson (Nasdaq: SWHC  ) . Let's tackle these in reverse order.

Start your portfolio off with a bang! (Actually, make it two.)
Beware of falling bullets. Investors in gun-toting stocks Sturm, Ruger and Smith & Wesson are likely to be firing into the sky, overjoyed at the receipt of a double-barreled blast of buy ratings from The Benchmark Company. Praising S&W as "a premier manufacturer of pistols, revolvers, and rifles, generating 88% of sales from the US commercial market," Benchmark likes the company's prospects as it sheds unprofitable ventures and focuses "on its core-product strength" -- things that go "bang."

If possible, the analyst likes Sturm even better. The company has even greater exposure (94% of sales) to the gun-happy U.S. market than does S&W. It also has "strong positive free cash flow" and a 2.8% dividend yield.

In terms of valuation, the stocks look similar. With $37.6 million in trailing free cash flow (FCF) versus S&W's $23.2 million, Sturm is the quicker picker-upper (of cash). But Sturm's larger market cap means it's also the more expensive stock, with a price-to-FCF ratio of 25 versus S&W's 20 multiple. Problem is, neither of these ratios looks particularly attractive in light of long-term estimates of 12.4% profits growth in this industry.

Long story short -- and with all due respect to Benchmark -- I'd rather be short these stocks than long.

JDS up?
Speaking of overpriced stocks, JDS Uniphase picked up an endorsement as well this morning, when Swiss megabanker UBS upgraded to "buy." Opining that "the optical component market ... has now under shipped its systems end market for 4-5 quarters," UBS argues this market is primed for a rebound, and JDS with it. Inventories, notes the analyst, are now basically run down, and in this environment, "continued [undershipment] of the end [markets] is not sustainable long term."

UBS predicts JDS could see growth on the order of 18% per year starting sometime toward the end of this year, versus the 12% long-term growth estimate more widely preached on Wall Street. The problem here, I fear, is that with free cash flow at JDS running around $88 million annually, and the stock trading at 28.5 times that sum, even 18% growth may not be fast enough to justify this stock's market cap. (And if the consensus is closer to the mark, and JDS can only grow at 12% -- look out below.)

The lurch at KERX
Last but not least, Keryx Pharmaceuticals reported disappointing earnings last week (if indeed, you can call a $0.13 loss "earnings" at all). This number missed analyst consensus targets, but that's not preventing analysts at Roth Capital and Ladenburg Thalmann from backing the stock.

The biotech startup is unprofitable. Heck, it's nearly un-revenue-able, with just $5 million collected last year. Regardless, Keryx CEO Ron Bentsur is scheduled to appear at the 11th Annual JMP Securities Research Conference in San Francisco next week, and there's always the chance he'll have something positive to announce. If you think it's worth betting on that chance, despite the stock's sky-high price-to-sales ratio of 20, now's as good a time as any to follow the analysts' advice, spin the wheel, and hope for some happy talk on May 15.

Or if you want to save some time, you could just go flush your money directly down the toilet. Your choice.

Whose advice should you take -- Rich's, or that of "professional" analysts such as Benchmark, UBS, and Roth? Check out Rich's track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith owns no shares of, nor is he short, any companies named above. He does, however, have public recommendations available on more than 60 other companies. Check them out on Motley Fool CAPS, where he goes by the handle TMFDitty -- and is currently ranked No. 341 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy. Motley Fool newsletter services have recommended writing naked calls on JDS Uniphase.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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