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, our prime time players include newly upgraded Nokia (NYSE: NOK  ) and now-buy-rated Sequenom (Nasdaq: SQNM  ) . Meanwhile, someone threw a monkey wrench at Capstone Turbine (Nasdaq: CPST  ) .

Avian upgrade gives Nokia wings
Leading off the headlines this morning is yet another upgrade for Nokia. The Finnish cell-phone maker's problems are well known -- key among them the fact that we still call it a "cell-phone maker," and not a "smartphone purveyor." But lately, Wall Street has been giving grudging approval to Nokia's efforts to cut costs and ride out a decline in Symbian-phone sales as it waits for wider adoption of the new Lumia line of smartphones it's partnered with Microsoft (Nasdaq: MSFT  ) to build.

Yesterday, we saw both Oppenheimer and Citigroup pull their "sell" ratings on the stock and upgrade to neutral. Today, analysts at Avian Securities went one step further and upped Nokia to "positive," sending Nokia shares soaring in the process. Are they right?

I'd love for Avian to be proved right. I own Nokia, you see, but I'm not exactly proud of it. Unprofitable today, and expected to be so minimally profitable next year that its P/E ratio is a nosebleed 42, the company's pretty much a shambles. Sure, if Nokia manages to conserve cash and if the big telecoms decide to subsidize its Lumia line when Windows 8 comes out, Nokia could be a big winner ... but it's an even bigger "if."

Sweet news for Sequenom
Speaking of risky stocks: Sequenom. Shares of the genetic-test specialist surged this morning on news that Maxim Group has "initiated coverage" of the stock at "buy" and thinks the stock will hit $6 within a year. But did Sequenom really deserve a 12% bounce solely on Maxim's say-so?

Honestly, it's hard to say. It's unprofitable today and unlikely to earn a profit next year either (indeed, few analysts expect to see profits at Sequenom any earlier than 2014), so it's hard to pin an exact value on a stock like Sequenom. On one hand, it's valued well in excess of 7 times annual sales, which seems kind of steep. Even if Sequenom grows revenues briskly, as Wall Street believes it will, well, there are other crapshoot biotechs like Dendreon out there with even faster projected growth rates, but Dendreon sells for less than half of the P/S ratio Sequenom sports.

On the other hand, Sequenom does have a real business, and real revenues, and it is growing these revenues. Sales were up 10% last quarter, and long-term growth is projected at 25%. Meanwhile, Sequenom has enough cash in the bank to keep itself solvent for another 18 months or so at current burn-rates. Long story short, I'm not brave enough to short this one, but until Sequenom proves itself capable of earning a profit, I don't think I'd buy it, either.

Capstone Turbine overloads
As for companies I might consider shorting, well, let's look now at today's featured downgrade. Small-scale turbine maker Capstone Turbine just reported a successful sale of 17 microturbines to Russian oil and gas behemoth LUKOIL. No sooner had it done so, though, than Capstone got blindsided by a downgrade from FBR Capital.

Formerly a fan of Capstone, FBR has doubtless been disappointed to see its June 2011 endorsement fall flat. More than flat, actually -- Capstone's down 26% since the analyst picked it. That's enough to dishearten any investor, much less one that lives under minute-to-minute scrutiny from its well-heeled clients. There's only so much pain an investor can take, and for now, FBR's decided to step aside and downgrade the stock to "market perform." FBR's real mistake, though, was recommending Capstone in the first place.

Consider: Despite growing sales strongly (revenue is up 5 times in size since 2007), Capstone's made precious little headway in generating actual profits, which are still mired in the red. Meanwhile, the free cash flow picture remains bleak, at $22.8 million burned in the past 12 months -- a number worse than reported net income (by which I mean to say, net losses). While analysts expect Capstone to turn profitable next year, and while its bank account looks plump enough to keep it liquid long enough to reach this goal, there's still no guarantee Capstone will make it.

Long story short, considering the wealth of profitable energy stock ideas out there (check out three of them, just off the top of our heads), I just don't see the need to gamble on a money loser like Capstone.

Whose advice should you take -- Rich's, or that of "professional" analysts like Avian, Maxim, and FBR? 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 shares of Nokia. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 326 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Dendreon and Microsoft. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2012, at 1:40 AM, jhf678 wrote:

    Cutting cost is the first step to positive. The Windows phone and tablet will probably compete with Apple in the future. Soon or later everything will catch up with Apple.

  • Report this Comment On June 20, 2012, at 7:48 AM, megastockmaster wrote:

    Waiting for SQNM to turn a profit is too long.

    If they win the injunction later this month, you will see them eliminate some competition.

    Despite the "competition", their sales numbers are beating expectations in a large market which has room for competitors.

    In addition, if they sign another insurance carrier, they will have a sales pipeline which will justify their hiring streak and new lab facilities --

    IMHO their test [MaterniT21] has better success rates than their competitors and doctors should think twice before giving a less reliable, if cheaper, test to a patient.

    The woman can just enter the doctor and ask for the test. The doctor can have it available. It is not like when I was in my mama and they had to do amnio which had big risks. now the doctor needs to learn about the product.

  • Report this Comment On June 20, 2012, at 10:22 AM, Teacherman1 wrote:

    I still like CPST for the longer term.

    They just need to keep plugging away until they can get their volume up.

    They are controlling costs, but that will take them only so far.

    The recent turmoil in the NG area has put a damper on that, but only for awhile.

    They still have an "under developed" market for their products to be used in other areas.

    It will take time for them to reach "break even volume", but I believe they will eventually get there.

    If someone is not familiar with them, they might want to go to their website to see all of the other areas that their microturbines are being, and can be used in.

    JMO and worth exactly what I am charging for it.

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