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.)

Considering 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, American depositary receipts of France Telecom (NYSE: FTE  ) are soaring on a rare upgrade.

Enough is enough
The French telecom giant, which also runs the multinational Orange brand of mobile networks, has seen share prices fall 33% over the last year (or 24% with dividends reinvested). But the Germans, of all unlikely allies, have had enough. Deutsche Bank slapped a "sell" tag on the stock back in January due to growing competition from low-cost providers like Iliad-owned Free Mobile.

But the worst is over now, says Deutsche's analysts. With an earnings report due on July 26, all signs point to the business stabilizing. Operating cash flows should firm up after spending the last few reports in free fall, and though Deutsche will keep a close eye on France Telecom's forward guidance, the firm doesn't expect any major surprises. (But then, who ever expects a surprise?)

And the bottom line is simple: "We see no reason to materially change our target price which is broadly in line with current trading levels." In other words, Deutsche set its $12.20 target price in January, and the market has adjusted to fit the firm's version of reality.

Grading the graders
If I sound snarky, it's because Deutsche Bank doesn't exactly have a stellar record in the telecom sector. The firm currently gets six of 15 picks right in our CAPS system, combining the picks from wireless telecom services and the broader diversified telecommunications sectors.

Deutsche Bank gets credit for picking some unorthodox winners and holding them for the long term, but the payoff in traditional telecom services is a mixed bag. Here's a sample of its most successful and least successful picks:

Company

Deutsche Bank's Pick

CAPS Rating (out of 5)

Deutsche Bank Beats/(Trails) S&P 500 by

SBA Communications (Nasdaq: SBAC  )

Outperform

*

111%

American Tower (NYSE: AMT  )

Outperform

****

86%

AT&T (NYSE: T  )

Outperform

***

45%

Telefonica (NYSE: TEF  )

Outperform

*****

(74%)

Source: Motley Fool CAPS.

In Deutsche's defense, you could say the firm often bets on beaten-down and unpopular stocks across the telecom industry. Telefonica scores huge points with CAPS investors, even in the face of weak returns. The opposite is true for SBA, which get a thumbs-up rating from a dismal 63% of CAPS players but has crushed the market in the long term anyway. For some perspective, American Tower and Telefonica both carry approval ratings north of 90%.

But the more likely explanation for Deutsche's rating is that its analysts understand the back end of this industry, while the actual networks remain a mystery. Flipping a coin on each of the firm's network recommendations could produce better results than the actual analyst research.

And France Telecom falls firmly on the network side of that fence. So while it's kind of cool for a France Telecom investor like myself to see the stock getting some Street cred, I'm not terribly impressed by this particular firm ditching its "sell" rating.

The Foolish perspective
From my point of view, the drawn-out price pressure more than reflects the competitive strain from Orange's new competition. The company is busy expanding into the next generation of BRIC-style territories like the Middle East, Africa, and the Caribbean. Patient investors who pick up shares here should see strong long-term returns as that investment pays off in coming years. And hey, those DRIP reinvestments pay off faster when share prices are low -- the yield today is an eye-popping 13%, after all.

France Telecom is a dividend dynamo, though I'll admit that the stock comes with some risks. For safer income-generating investment ideas, take a look at our brand-new report: "The 3 Dow Stocks Dividend Investors Need." The report is totally free, but only for a limited time, so grab your copy today.

Fool contributor Anders Bylund owns shares in France Telecom but holds no other position in any other 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 American Tower and 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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4/24/2014 12:33 PM
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