This Just In: 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." 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.

Nomura Securities has been bearish on European telecom stocks, but the gloom is lifting: The firm just upgraded the sector as a whole to "hold." Let's dig into the details of this wide-ranging call.

Painting the market in broad strokes
Less than a month ago, Nomura posted an update on Spanish telephony giant Telefonica (NYSE: TEF  ) . The sell rating was kept in place because the firm wasn't ready to "call a bottom in the stock." Telefonica's exposure to the shaky Spanish economy was simply too much.

But this week, the risk-reward ratio turned positive for Nomura. European stocks in general still look risky due to "the level of policy uncertainty that prevails," which makes defensive strategies too pricey to be worth the risk. But pouring assets into stocks with high dividend yields and strong cash flows, such as the telecom sector, is a whole 'nother ballgame.

More specifically, Nomura listed Telefonica, France Telecom (NYSE: FTE  ) , and Telecom Italia (NYSE: TI  ) among the high-yield communications giants that look modestly attractive right now. All of these stocks have underperformed the general market by a wide margin over the last year: 52-week returns range from -26% for Telecom Italia to a heart-stopping -47% for the Spanish operator. These rock-bottom prices both increase the dividend yield and lower investment risks, as long as the companies' fundamentals remain solid.

The wisdom of the crowds
Does our CAPS community agree with Nomura's take on European telecoms? Let's take a look:

Company

1-Year Return

Dividend Yield

CAPS Score
(out of 5)

Telefonica

(47%)

17%

*****

France Telecom

(38%)

14%

****

Telecom Italia

(26%)

6%

***

Source: Google Finance on July 9, 2012. Market returns do not assume reinvestment of dividends.

It's a mixed bag: CAPS players aren't terribly impressed by Telecom Italia, but the other two stocks earn high grades. However, all three held four-star ratings or better as recently as last week.

All-star player Gouldberg explains why Telefonica looks tempting: "If you think Spain will find a way through it's debt crisis, [Telefonica] looks to be a good way to bet on the recovery. I liked it at $18, love it at $12." And if European risk scares you stiff, Gouldberg notes that half of Telefonica's earnings flow from Latin America. There's some geographic diversification for free.

All these stocks actually come with fewer Europe-centric risks than you might think. France Telecom mitigates its Old World risk with expansion in Africa, the Caribbean, and the Middle East; Italia also runs a mobile network in Brazil with economic interest in an Argentinian operator.

The Foolish takeaway
I'm already on this bandwagon with real money invested in France Telecom. Today, I'm pouncing on Telefonica's deep value by starting a bullish CAPScall on the stock. Like Nomura, I have come to the conclusion that these multinational titans come with more opportunity than risk -- and it's almost impossible to find strong, cash-flow-backed dividends like these in any sector or geographic market.

Maybe you'd prefer trading some dividend yields for greater stability. That's OK -- the Fool's still got you covered. Take a look at the three Dow stocks dividend investors need in a special report that's free for a limited time. You can also take a look at dividend dynamos past and future with our new premium research reports that break down the opportunities in both General Electric and Apple as well.

Fool contributor Anders Bylund owns shares in France Telecom but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of France Telecom. Motley Fool newsletter services have recommended buying shares of France Telecom. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On July 10, 2012, at 2:48 PM, MadStabber wrote:

    As an FTE bandmember you should mention that the French government taxes foreigners 30% of the dividend in an IRA or 15% for taxable accounts. But still 10% is a decent recent for a Euro blue chip...

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