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 have new downgrades weighing on Petrobras (NYSE: PBR  ) and Annaly Capital (NYSE: NLY  ) to examine. Then, so as not to end on a down note, we'll wrap up with an upgrade on Oracle (Nasdaq: ORCL  ) . Ready? Then let's begin.

What's Portuguese for "money pit"?
First up, Brazilian oil major Petrobras got hit hard this morning, broadsided by a twin shotgun blast from Wall Street and The Wall Street Journal. Energy analysts at Simmons & Co. started off the attack with a downgrade to neutral this morning, presumably discouraged by yesterday's report that Petrobras's five-year, $236.5 billion project to increase oil production isn't moving forward as quickly as planned. Even as costs rise (up 5% from previous estimates), Petrobras has cut its 2020 targeted rate of production by 11%, to just 5.7 million barrels per day.

Simultaneously, the WSJ blasted Petrobras as a company that's going to do great things "tomorrow" -- yet somehow tomorrow never quite arrives: "As spending rises and output expectations fall, the promise of all that opportunity recedes further from investors [and the shares] ... have dropped by roughly half over the past two years."

That's a crying shame, because the truth is that if Petrobras could just execute as a business should, this stock would be going gangbusters by now. Priced at a measly 6 times forward earnings, and paying a tidy 1.3% dividend, the stock looks cheap -- but for the fact that analysts are so fed up with management that they're only modeling 4.4% long-term earnings growth. (By way of comparison, mighty ExxonMobil (NYSE: XOM  ) gets credit for growing twice as fast and gets a higher earnings multiple as a result.)

Annaly Capital Mismanagement?
Speaking of money pits, shares of REIT industry bellwether Annaly Capital Management haven't exactly been setting the world on fire lately. Indeed, they're down about 8% over the past year, and in a mildly bullish market. Worse, according to the analysts at Compass Point, Annaly's not out of the woods yet.

Downgrading the shares to neutral this morning, Compass fretted: "Over the near term, we expect an increase in prepayment speeds (both through increased regular way refi activity and an increasingly effective HARP 2.0 program) to have a negative impact on the net interest margin." Sure, investors still like the dividend (shares yield 13%). But with Annaly shares still trading at close to 30 times earnings, but pegged for only 3% long-term earnings growth, the stock price could be vulnerable in coming quarters.

Longer term, Compass still believes the stock will perform well as a "relatively steep yield curve, which has been anchored by the Fed" and continues to allow management to mint profits at low risk. So I guess the good news here is that while downgrading today, Compass Point will remain on the lookout for an excuse to upgrade again. Whether the excuse is good enough to risk your money on this heavily indebted company, however, is another question entirely.

The omens are good: Expect profits at Oracle
It gets a Fool to wondering if perhaps the safer path to profits might lie in buying a company with no net debt. A company that looks cheap, and that generates so gosh darn much cash that it's actually cheaper than it looks? A company -- not to put too fine a point on it -- like Oracle.

In recent months, Oracle's critics have argued that rivals like SAP and salesforce.com (NYSE: CRM  ) will eat its lunch as industry switches from on-premise software programs to software as a service -- also known as software "on-demand."

This morning, however, analysts at ThinkEquity dismissed these worries as "too bearish." Predicting that Oracle's Q4 profits numbers (due out next week) will be no worse than "in line" with Wall Street estimates, and that guidance will be similarly "good enough," ThinkEquity thinks investors should beat the rush and buy shares ahead of earnings. I agree.

Buying Oracle is by no means the only way to get rich from stock investing. (Here -- take a look at 3 More Ways.) But with trailing free cash flow ($13 billion) far superior to what it reports as "net income" ($9.7 billion), Oracle is doing quite well for itself as a money-printing operation. Indeed, contrary to what the bears may say, free cash flow is actually still growing -- just as it's done every year for the last decade. At barely 10 times free cash flow, and an even cheaper enterprise value-to-free cash flow ratio, Oracle's a fine choice for any investor's portfolio.

In fact, I'm so sure this stock will outperform that I'm heading over to CAPS right now to publicly endorse the stock at a long-term winner. Think I'm wrong? Follow along ... and find out.

Whose advice should you take -- Rich's, or that of "professional" analysts like Simmons, Compass Point, and ThinkEquity? 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 does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 342 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Oracle, salesforce.com, and Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Petroleo Brasileiro, Annaly Capital Management, and salesforce.com and creating a bear put spread position in Salesforce.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors.


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