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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." 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, our featured ratings include a downgrade for NVIDIA (Nasdaq: NVDA ) and upgrades for CF Industries (NYSE: CF ) and Triangle Petroleum (NYSE: TPLM ) , the latter which saw a 20% boost to target price! Let's tackle these in reverse order.
Triangle Petroleum -- mind the pointy end
Think it's crazy to invest your hard-earned money in a small-cap oil operator with a 202% negative profit margin? Well, that's where you're wrong -- at least according to Wunderlich Securities. Following a Thursday earnings report that one contributor on SeekingAlpha described as "rockin'" -- with oil production up 67% sequentially, and more than 50% ahead of consensus projections -- Wunderlich is upping its price target on this $7 stock to $10.
Sound good? Well, it might be, except for a few nagging details. For one thing, as already mentioned, Triangle is sucking a lot of hydrocarbons out of the ground -- but so far, it's had no luck refining the stuff into actual profits. Despite the sales growth, Triangle ended the quarter with a loss. Meanwhile, its cash flow statement continues to show significant cash-burn -- in excess of $120 million last year alone. Granted, management confirmed that it's got nearly that much cash in the till, which suggests the next round of shareholder dilution is still a few quarters away.
But unless and until Triangle figures out how to fund its own business from the cash its business generates, investors who follow Wunderlich's advice, and buy the shares, need to anticipate that these shares will be worth less -- not more -- once Triangle issues more of its own. When you're involved in a cash-burning business, that's just the price of keeping the doors open and the lights on.
CF Industries gets an A
Looking for a better way to make money in the market? Analysts at Feltl have one suggestion: Forget oil, and buy fertilizer instead. The analyst just upgraded shares of fertilizer maker CF Industries, and for once, this is a Wall Street recommendation I can agree with.
Profitable where Triangle is not, generating cash where Triangle burns it, and boasting a balance sheet of rock-solid strength, CF Industries looks every bit the value investment at a price-to-earnings ratio of just 8.2. Analysts expect a drought-stricken nation to turn to fertilizer to try and make up the difference in next year's corn harvest, helping support a trend of nearly 11% annual profits growth at CF over the next half decade. To top it all off, CF even pays a small dividend.
Overlooked, undervalued, and overshadowed by higher-profile fertilizer concerns like Mosaic (NYSE: MOS ) and PotashCorp (NYSE: POT ) -- both of which tend to produce only half as much free cash flow as they claim as "net income," even as CF generates more cash than it reports as profit -- CF remains one of the great undiscovered gems of the fertilizer industry. Kudos to Feltl for digging it up.
Finally, and with apologies for ending on a down note, we come to the big downgrade of the day, as analysts at Cantor Fitzgerald cut NVIDIA off at the knees.
Priced at 17 times earnings, but expected to grow these profits at only 14% a year over the next five years, NVIDIA was already looking pretty vulnerable to a downgrade. But the real kicker, says Cantor, is that "80% of Nvidia revenues are tied to sectors of the PC and computer ecosystem." According to the analyst, "Nvidia continues to do well in these segments [but] we expect little to no growth over the next several years."
So much for the 14% growth rate. But is it really as bad as all that?
Honestly, it's hard to see how Cantor can have such confidence in its predictions of what will happen five years out, in as fast-changing a tech sector as semiconductors. What we do know is this: Over the past year, NVIDIA generated $671 million in positive free cash flow -- a good 41% more than it reported as "net income." We know, too, that the company boasts a strong balance sheet, with $3.3 billion in cash against just $20 million debt. As a result, the stock is currently selling for less than eight times annual free cash flow, and should be a buy at any growth level greater than the high single-digits.
The upshot: If you buy Cantor's argument that NVIDIA is stuck in a rut, and will show zero growth for the next half-decade, then the stock's probably a sell. On the other hand, if you think NVIDIA can manage double-digit growth at any level, NVIDIA's still a buy -- Cantor's downgrade notwithstanding.
Could Cantor really be wrong? You be the judge: Read our new free report, and find out why The Motley Fool thinks NVIDIA will lead "The Next Trillion-Dollar Revolution."
Whose advice should you take -- mine, or that of "professional" analysts like Wunderlich, Feltl, and Cantor Fitzgerald? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.