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 start off with a "paired trade," as one analyst gets (seemingly) more optimistic about Research In Motion
Researching a buyout
Wall Street was a-flutter Wednesday over reports that Canadian smartphone maker Research In Motion is about to report its second-in-a-row quarterly loss. That sounds like bad news, and a lot of analysts are treating it as such. However, the bankers at JMP Securities took an opposite view.
News that RIM has hired JPMorgan Chase and RBC to advise it on its "strategic options" suggests a buyout could be in the works. While it might not be a great idea to buy the stock on this rumor -- if no white knight rides in, you'd be stuck owning a money-losing company -- the possibility that a buyer may materialize makes shorting the stock a risky proposition. Hence, JMP is urging RIM skeptics to take what money they've made already and run. Here, discretion is the better part of value investing.
That's good advice. As bad as RIM's business might be, and even if it is getting worse, this is still a company churning out cash at the rate of $2 billion a year. At today's enterprise value, the stock could be selling for cash in as little as two years. Eventually, this elevator that only goes down must hit the floor. Beware what happens if it bounces.
Just say no to Nokia?
As JMP expressed muted optimism about Research In Motion, the analysts at MKM Partners are turning even more negative on RIM rival Nokia. The Finnish phone maker just paid out its dividend for the year, a whopping 6.5%, and with that disbursement finalized, MKM sees no further reason to stick around -- and advises selling the stock.
Here again, though, there's risk in getting overly negative. Like RIM, Nokia remains a free-cash-flow-producing company. With just $138 million generated over the past year, it's a shadow of its former self, true. But the company's currently selling for less than the cash it's got in the bank, and for just a small premium to cash net of debt.
Nokia also -- unlike RIM -- has strong allies in the form of Microsoft and AT&T, both of which have made big bets on the success of Nokia's next-gen product, the Lumia smartphone. Absent a clear indication that Lumia will fail, and that all three of its backers will allow it to do so, this one's simply too risky to short.
Up, up, and away?
Speaking of companies doomed to fail: airlines. Longtime Fool readers will no doubt remember former Fool contributor, now hedge fund honcho, Whitney Tilson's classic column "Beware of Steel and Airlines," which warned against the perpetual allure of this high-flying industry. Even non-Fool readers probably remember Warren Buffett's tongue-in-cheek advice on the subject: "How do you become a millionaire? Make a billion dollars and then buy an airline." So what does it say about the analysts at Imperial Capital that they chose to recommend buying not one, but three separate airline stocks?
Initiating coverage of Delta
But Imperial Capital is wrong.
Sure, at P/E ratios of eight, nine, and 15, respectively, the stocks don't look terribly expensive. Some of them are even generating cash. Tumbling prices for oil, and the likely lower costs of fueling up airplanes that will result, also argue in favor of buying airline stocks today. Over the longer term, however, their historical problems remain, and will continue to afflict them. Weak cash generation, vulnerability to periodic oil shocks, and, of course, sky-high levels of debt make all three of these companies riskier bets than what Imperial suggests they might be.
My advice: If you absolutely, positively must own an airline, at least pick the one with the most consistent record of profitability in the industry, and the one that consequently carries the lowest level of net debt. Its name is Southwest Airlines, and it's the only airline investors should even consider flying.
Whose advice should you take -- mine, or that of "professional" analysts like JMP, MKM, and Imperial Capital? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
