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 prospects at GT Advanced Technologies (Nasdaq: GTAT ) and Phillips 66 (NYSE: PSX ) , but talking down Molycorp (NYSE: MCP ) . Let's find out why, beginning with...
Investors in specialized semiconductor manufacturer GT Advanced Technologies are cheering an upgrade (to "buy") from Canaccord Genuity this morning, even if they're not quite clear on why the upgrade happened. In a note released Friday, Canaccord cited the potential for manufacturers using sapphires in smartphone glass as a positive factor for GT. This has been rumored for some years, with both Apple (Nasdaq: AAPL ) and Nokia (NYSE: NOK ) having both been mentioned as looking to use "sapphire" to replace "glass" in smartphone screens. Seems a bit tenuous -- and Canaccord's arguments aren't improved much by its cryptic reference to management's "body language" as reinforcing its opinions. (Canaccord didn't elaborate on the specifics).
Here's what we do know, though. At current share prices, GT sells for just 5.5 times trailing earnings. Long-term growth estimates hover around 10% per year, which suggests pretty significant undervaluation. In short, I don't know what information we can glean from GT's "body language" -- but the share price speaks volumes: GT Advanced Technologies looks cheap.
And speaking of cheap...
I mentioned last month how new Warren Buffett holding and ConocoPhillips spinoff Phillips 66 looked pretty cheap at its then-current share price of $37. $5-a-share and one earnings report later, though, the stock looks less interesting to me. (Indeed, I recently cut it from my own CAPS portfolio after crunching the numbers and finding Phillips unattractive).
Fortunately for Phillips investors, not everyone's so fickle. This morning, JPMorgan Chase followed in Buffett's footsteps by rating Phillips "overweight," and assigning a $59 price target. With the shares costing just 5.5 times earnings (right in line with GT) and growing at 6% per year, there's every chance the pick will work out for JP and its clients.
My main worry isn't earnings, but free cash flow -- which has slowed markedly from the levels we were seeing back when I recommended the stock. Investors trusting that Mr. Buffett knows what he's doing may feel encouraged today by JP's vote of confidence -- and more sure than ever that this stock is a buy. More cautious individuals will want to wait before buying and see if Phillips can get its free cash flow engine revving once again.
"Macro pressure" for Molycorp
Last (and least, in Wall Street's opinion), we come to formerly mighty Molycorp, once billed as the western world's best chance of breaking the Chinese near-monopoly on rare earth metals. Earlier this month, Molycorp shocked the Street with its report of an unexpected quarterly loss. Now we learn the company is also planning to dilute its burned shareholders with a new $120 million stock offering -- and potentially dilute them even more by issuing $360 million worth of "convertible" (i.e., into stock) debt.
The move was necessary without a doubt. As StreetInsider.com explains, Molycorp's been struggling with "macro pressure" from falling rare earths prices. As a result, it's been burning more than just shareholders. Its attempts to get big enough to at least make money on volume have consumed $680 million worth of cash over the last year, and the company had to do something to replace all that crispy cash.
Still, piling dilution upon capital losses doesn't sit well with investors, and this morning the analysts at Dahlman Rose reacted to Molycorp's announcement by downgrading the stock to hold and cutting their profits estimate in half. Shares are down 10% today in response -- and 77% over the past year.
No surprise there. Generally speaking, investors prefer shares that go up and management that doesn't dilute them out of their interest in the company. If these are things that appeal to you, you've probably heard of a little company called Apple. Today, the stock hit an all-time high in anticipation huge year-end growth from the coming iPhone 5. Make sure you understand all of the key Apple opportunities, as well as the pitfalls it needs to avoid, by claiming a copy of our brand new premium research report. We're also throwing in a full year of updates to go with it, so make sure you click here and claim a copy now.
Whose advice should you take -- mine, or that of "professional" analysts like Canaccord, JPMorgan, and Dahlman Rose? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.