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, down here on Main Street, we've got some pretty sharp stock pickers, too. (And we're not always impressed with how Wall Street does its job.)
Given that, 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. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Today, Wunderlich Securities refines its analysis of a complicated oil and gas producer.
You got to know when to hold 'em, know when to fold 'em...
Wunderlich has been interested in SandRidge Energy (NYSE: SD ) for a while. The firm started covering SandRidge's profit management entities, the SandRidge Permian Trust (NYSE: PER ) and SandRidge Mississippian Trust I (NYSE: SDT ) , with buy ratings last year. The mothership's buy rating followed last month.
But times have changed. In January, the Mississippian Trust dropped to a hold rating after climbing 33% under Wunderlich's watch -- and paying out $1.89 in dividends to boot, for a total return of 42% to that point. Well played, gentlemen.
And this morning, the other shoe dropped. Mississippian units have swooned 24% since the downgrade to hold, or 20% with dividends reinvested, and now Wunderlich calls it a sell. At the same time, the Permian Trust fell back to a neutral rating, though that dividend vehicle has kept pace with the S&P 500 while Wunderlich watched. SandRidge itself remains a buy recommendation.
And the reasoning behind these twin downgrades is simple: The value of a so-called term trust should fall over time as the profit distribution vehicle burns through the cash-making assets under its umbrella. When the wells in the Mississippian formation and in Permian's Texan interests run dry, these profit distributors will fold, too. Nothing lasts forever. It's the natural order of things.
Should you listen to these guys?
Before digging into whether these downgrades make any sense, let's consider Wunderlich's track record in this sector.
The firm is an all-star CAPS player overall with a rating of 83.7. However, most of these gains come from totally unrelated sectors such as software, media, and health-care equipment. The oil and gas market is a key focus area for Wunderlich, with more calls than any other sector – but here it's a serious underperformer with a negative score.
Interestingly, Wunderlich almost always slaps buy ratings on energy stocks. That makes me think a bit harder about these downgrades, as the firm is reluctant to move into sell territory at all in the energy sector. And as spotty as the energy scorecard is here, some of Wunderlich's biggest victories have also sprung from this sector: The firm closed out recommendations on Rosetta Resources (Nasdaq: ROSE ) in 2011 and ATP Oil & Gas (Nasdaq: ATPG ) in 2010 -- locking in a five-bagger and a four-bagger, respectively.
Moreover, the firm also performs very well in the REIT sector, which leads me to the conclusion that Wunderlich understands dividend trusts better than most. That insight should translate into actionable calls on nontraditional oil investments that really act more like a REIT than a driller.
The Foolish takeaway
All things considered, I can only nod along with Wunderlich's conclusions here. SandRidge is the core of the whole operation -- the head and heart that keeps the other limbs flexing. For reasons of fiscal efficiency, it keeps forming trusts like the Mississippian and the Permian, which spit out astounding cash distributions until their value is exhausted. By then, SandRidge has moved on to start a new trust or two, overlaid on a different set of (hopefully fresh) assets.
So the trusts are useful as short-term cash machines. SandRidge proper is the stock you'd buy and tuck under your pillow for decades to come. Fellow Fool David Meier agrees, though our top energy analysts have uncovered an even better oil stock for the long haul. Read all about the only energy stock you'll ever need in a special report, free for a limited time.