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, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, 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.
Today, Wall Street is talking up the fortunes of three stocks in particular: rare-earth mineral miner Molycorp (NYSE: MCP ) , oil refiner Tesoro (NYSE: TSO ) , and satellite radio star Sirius XM (Nasdaq: SIRI ) . Let's find out why, beginning with...
Molycorp's murky future
Shareholders of "the little miner that could" (upset China's monopoly on rare-earth minerals) are cheering this morning, as megabank Morgan Stanley reinstates its coverage of the stock with an "overweight" rating and a $20 price target.
It's been a rough year for Molycorp, with shares down nearly 80% over the past 12 months, and last week's report of an unexpected loss certainly didn't help matters. But don't lose faith, says Morgan Stanley -- this stock could nearly double over the year ahead.
That's kind of a strange claim, considering that Molycorp is only barely profitable ($900,000 trailing profit) today, and burned through nearly $680 million in negative free cash flow over the past year. The timing's also suspect, given that just this morning, The Wall Street Journal ran a story on how India is moving to exploit more of its own rare-earth reserves -- said to be the third largest in the world. The potential for India flooding the market with rare-earth minerals doesn't seem to jibe with the potential for Molycorp to become a big, profitable winner ... but then again, logic has never been Wall Street's strong suit.
Tesoro takes on the titans
In other news, Tesoro just announced it will pay $2.5 billion to take over BP's (NYSE: BP ) California refinery operations, transforming it in a blink into the second biggest refiner in California (after Chevron (NYSE: CVX ) ).
Investors loved the idea, bidding up Tesoro shares 9.5% after the announcement yesterday -- and it appears Wall Street is on board, too. So far, at least two major oil analysts. Dahlman Rose and Oppenheimer, have endorsed the deal, with Dahlman upping its price target 20% to $48, and Oppy upping by a full two-thirds -- to $50 a share.
It's not hard to see why. At eight times earnings, a near-8% growth rate and a 1.4% dividend yield, Tesoro looks no worse than fairly valued today. Add a deal worth half its own market cap to the mix, and all the growth that comes with it, and Tesoro has plenty of room to run.
Sirius is no dog
And finally, we come to the stock that everyone loves to hate (or love -- there's rarely any middle ground on this stock): Sirius XM. The satellite radio monopolist recently reported featuring "healthy subscriber gains" (Forbes) in Q2 and a promise to add 1.6 million net new subscribers to its rolls in 2012.
Analysts at Wunderlich responded to the news today with a 19% boost to price target, and now say Sirius deserves its $2.50-per-share valuation. Investors are reacting negatively to Wunderlich's comments, however, bidding Sirius down slightly in today's up market. Why?
Probably, they're thinking that with a P/E ratio of less than five, and a projected growth rate of 22.6%, Sirius deserved something a bit more optimistic than the "hold at this price" rating Wunderlich gave them. But here's the thing: Wunderlich is right. Sirius is fairly valued today. It is not cheap.
The reason is that Sirius' ultralow P/E ratio derives almost entirely from a massive $3 billion tax credit the company booked last quarter -- "paper profits," in other words. Value the company on a more valuable form of paper -- free cash flow --and it's really only generating about $513 million in free cash annually.
Now don't get me wrong. $513 million is still pretty substantial loot. It's enough to keep the price-to-free-cash-flow ratio down below 19, and the enterprise value-to-free cash flow ratio at 22.6. But on a similar 22.6% growth rate, Wunderlich's right. This stock is a "hold," not a "buy."
Whose advice should you take -- mine, or that of "professional" analysts like Morgan Stanley, Dahlman, and Wunderlich? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.