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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.
Fewer minuses at Enerplus
For the second time in as many weeks, investors in Enerplus (NYSE: ERF ) were treated to an analyst upgrade yesterday, as Barclays joined Credit Suisse in upgrading the Canadian oil concern. While at 55 times earnings Enerplus still looks expensive on a P/E basis, its shares are down more than 50% in the past year. And it seems this discount is starting to attract attention on Wall Street, as first CS and now Barclays have decided that enough is enough -- it's time to wade back into the oil patch, and pick up some shares of dividend-rich Enerplus.
Are they right?
Let's go to the tape
Initial indications look good. Fact is, if you're going to factor analyst recommendations into your buy/sell decisions, you could do a lot worse than taking advice from Barclays and Credit Suisse. Both analysts rank in the top 10% of investors we track here at CAPS. What's more, both have been on recent winning streaks with their oil and gas picks. The majority of their active recommendations are beating the market, with Barclays boasting a 1,005 percentage-point margin of victory over the S&P 500.
Credit Suisse's record isn't too shabby either, as 56% of its oil and gas picks are currently in positive territory versus the S&P. What's more, with a longer record of published stock picks to its credit, CS has established a record as an exceedingly accurate stock picker (in a world where most analysts are anything but accurate).
Wait -- we agree with whom?
These bankers also happen to agree with some savvy stock pickers here at Fool.com. Energy analyst Joel South, for example, recently argued in favor of Enerplus as a company with "a great balance sheet," "great land" assets, and one making a "good move" in conserving cash (albeit by way of cutting its dividend) for use in a move to more profitable oil and natural gas liquids production.
Granted, there's still the question of why, if Enerplus is so "good" and "great," its stock performance has been so undeniably lousy of late. Joel argues, though, that this isn't really Enerplus' fault, but rather part of an "industrywide" trend.
Shares of rival producers Northern Oil & Gas (NYSE: NOG ) and SandRidge (NYSE: SD ) , for example, aren't doing much better than Enerplus, thanks largely to the fact that natural gas prices "have been tanking." Nor is Enerplus the only oil and gas company out there that's been forced to cut its dividend to try to stay afloat. Fellow Canadian oil firm Pengrowth Energy (NYSE: PGH ) has made a similar cut in recent months and Penn West Petroleum (NYSE: PWE ) might go the same route.
Fools of a feather... rarely flock together
And yet, understanding why Enerplus is in its current fix -- or even agreeing that it's not really the company's fault -- doesn't necessarily mean we have to agree that the stock is a good investment. To the contrary, whatever the reasons for Enerplus' share price showing more minuses than pluses lately, it's hard to be optimistic about numbers like these.
Consider: For one thing, it's been two years since Enerplus last turned in a free-cash-flow-positive year (which is part of the reason the company has a balance sheet comprised of more than $940 million of net debt). Plus, at 55 times trailing earnings, the stock costs an awful lot even if analysts are right and Enerplus eventually succeeds in turning things around, and embarks on a voyage of 21% annual profits growth. (By the way, 55 times earnings is way more expensive than the valuations being given to any of the other companies named above. Northern Oil, for example, costs only 17 times earnings, and if Wall Street analysts are to be believed, Northern Oil is actually expected to grow faster than Enerplus over the next five years.)
As for the dividend... honestly, Fools, I can't even bring myself to get excited about that one. While I'm all in favor of 8% dividend yields in general, the fact that Enerplus has to spend more than five times annual profits to maintain its dividend -- combined with the fact that the company has basically zero cash on hand to make up the difference -- tells me this dividend just can't last, at least not at its current level. And considering that it's probably the dividend alone that's keeping investors sticking around after Enerplus' 52-week nosedive, I shudder to think what will happen when management finally bites the bullet and cuts the divvy down to a level that's actually sustainable.
Speaking of which, if you're the kind of investor who likes your dividend to last more than a few quarters before getting cut or disappearing into thin air, make sure to take a look at our new report: "Secure Your Future With 9 Rock-Solid Dividend Stocks". Download it for free today.