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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Careful -- this rose has thorns (part deux)
What a difference a month makes. Remember how in May, we were discussing the salvo Dahlman Rose fired at the fertilizer industry? The analyst was downgrading stocks across the board, worrying that an "exceptional" corn crop in 2012 would torpedo corn prices, and deprive farmers of the cash they'd need to buy fertilizer for subsequent crops. CF Industries (NYSE: CF ) and CVR Partners (NYSE: UAN ) both got hit with sell ratings, while former Wall Street darling Rentech Nitrogen (NYSE: RNF ) slipped to hold.
In fact, the analyst was so convinced things were playing out badly that it doubled down 10 days ago, slapping a sell rating on industry bellwether PotashCorp (NYSE: POT ) . The company reduced 2012 estimates, introduced a 2013 earnings estimate below the current consensus, and faces sluggish potash export markets for the rest of the year -- these were just a few of the kind words Dahlman had for the fertilizer industry.
And then the sun came out.
Bright days for fertilizer
Executing a clean 180 on its previous opinions, Dahlman rose from its bed yesterday with a much brighter outlook for fertilizer. Why? Maybe the analyst looked out the window, maybe it checked the thermometer, or perhaps it just read the headline in the morning edition of The Wall Street Journal, which described how "large sections of Illinois, Indiana, Missouri and Kansas face drought conditions," giving rise to "concerns the dry weather will lead to a lower harvests."
In no time at all, Dahlman revised its opinion from stark pessimism to giddy optimism, reversing course and upgrading everyone it had previously downgraded -- and more:
- Potash and CF both jumped from sell to buy.
- Rentech went from hold to buy.
- Agrium and Mosaic (NYSE: MOS ) got buy ratings of their own.
- Intrepid Potash and CVR, less fortunate than the rest, at least had their sell ratings yanked, and were upgraded to hold.
To the analyst's way of thinking, investors here are really faced with a "heads you win, tails you can't lose" situation. Either the weather improves, the corn crop is huge (as it used to think), and the prospect of lower corn prices has already been priced into fertilizer shares... or else the crop withers, corn prices spike, and farmers make out like bandits -- buying more fertilizer for next year, hand over fist. Either way, the stock prices go up.
Sound too good to be true? It may be.
5-Year Growth Rate
Free Cash Flow as a % of Net Income
According to both S&P Capital IQ and Yahoo! Finance, no long-term growth projections are available for CVR.
Opinions change, value doesn't
Contrary to Dahlman's suggestion, if you compare these numbers to how they looked just a little over a month ago, very little has changed. The growth rate at Potash is up a bit, true. Rentech Nitrogen has gotten a lot less expensive (because it's lost a lot of share price), while Mosaic and CF have both gotten a bit more expensive. But really, the changes have been minor. So to the extent that Dahlman is saying "the stocks are down already, and they can't go down any further," well, this flies in the face of both the facts and what Dahlman itself was telling us just a few short weeks ago.
As for the other part of the analyst's argument, that Midwest corn crops are withering on the vine (so to speak), well, the view out my window here in Indiana confirms that Dahlman's right on the mark on that one. There's an awful lot of stunted-looking plants out there. For the time being, though, I stand by my opinion, expressed in last month's column, and previously: Out of all the fertilizer stocks on the market, the only one that is actually cheap enough to risk buying is CF Industries -- cheap, growing, and free-cash-churning CF Industries.
As for the rest: Leave 'em be. They're not ripe yet. Instead, take a look at a few of the "Stocks Only the Smartest Investors Are Buying." The report's free today, but it won't be for long -- so click quick.