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, 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 down JPMorgan Chase (NYSE: JPM  ) , as well as both of America's biggest telecoms -- AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) . Meanwhile, one analyst is talking up the prospects at tiny Celldex Therapeutics (Nasdaq: CLDX  ) . Let's start the day on a happy note, and find out why.

Cantor Fitzgerald hearts Celldex
First up today, immunotherapeutic vaccine maker Celldex topped consensus estimates last month when it reported a $0.23-per-share loss . This had the virtue of being $0.02 better than the loss Wall Street expected. Celldex is expected to soon begin work on a Phase II pilot study for a drug to treat kidney disease, and has multiple updates on other research that's scheduled to be released in Q4 of this year.

That's a whole lot of potential catalysts waiting in the wings, and investors have already begun buying, but analyst Cantor Fitzgerald thinks the stock can do even better than the clean double it's scored over the past 12 months. Cantor's urging investors to buy the shares, and upping its price target on the stock by nearly 30%, to $9 a share. Is it right to do so?

The answer really depends on how big of a gambler you are. With less than $10 million in trailing revenues, Celldex is less a business than it is a dream of eventually becoming one. Analysts look as far out as 2016, and still don't see the company earning a profit. With cash burn accelerating, and less than $80 million in the bank, Celldex is likely to run out of money, and need to raise new capital long before profitability arrives. In short, if you want to bet on Celldex, expect significant dilution -- and expect to have to buy multiple times to maintain the value of your stake in the company.

Not everyone loves iPhone
Dilution on the scale that  it will take to keep Celldex afloat, is not a problem that investors in AT&T and Verizon need to worry about. Then, again, they have their own problems. This morning, investment banker Stifel Nicolaus downgraded both telecom stocks to "hold." Why?

Actually, you can answer that question in one word: iPhone 5. The astounding success of Apple's (Nasdaq: AAPL  ) latest wonder-gizmo -- sold out in many markets, and with a two-week waiting period -- means AT&T and Verizon will be eating the cost of subsidizing a lot of phones in the near-term, squeezing their profit margins, and putting pressure on both stocks.

Longer term, however, the picture looks more bullish -- for at least one of these companies. Once this wave of subsidies subsides, analysts expect the higher data usage of the new LTE device to help Verizon capture nearly 11% profit growth over the next five years. At an enterprise value-to-free cash flow ratio of less than 10x, and with a strong dividend to boot, Verizon will do just fine from today's prices, making today's downgrade a great excuse to "zig when the market zags," and buy Verizon at a discount.

AT&T, in contrast, with weaker free cash flow and a higher enterprise value, is no bargain at an EV/FCF ratio of 18.0, and a slower growth rate than Verizon boasts. In short, there are two clear winners from the iPhone 5 phenomenon. One of them is Apple. The other is Verizon. Neither one is AT&T.

And speaking of losers ...
Our other big downgrade of the morning news cycle was JPMorgan, which Standpoint Research is unloading after capturing a post-"London Whale" bounce that outperformed the S&P 500 by 6.5 percentage points.

Why get out of JPMorgan today? Actually, you may not have to. At less than 10 times earnings, but with a 3% dividend yield and nearly 7% long-term earnings growth projections, the stock still looks fairly priced. But given the risks that Standpoint highlights -- "European exposure and low interest rates" that will crimp profit margins -- discretion is probably the better part of value here. As we saw earlier this year, Mr. Market will occasionally sell JP down to ridiculous levels, for no good reason, and give you a chance to buy the stock on the cheap. But since the stock isn't particularly cheap right now, why overpay?

And speaking of overpaying, have you ever wondered if Apple itself might be a bargain at less than 17 times earnings? Read our new, premium research report on Apple and we'll walk you through the numbers.

Whose advice should you take -- mine, or that of "professional" analysts like Cantor, Stifel, and Standpoint? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.

Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 291 out of more than 180,000 members. The Fool has a disclosure policy.


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  • Report this Comment On September 18, 2012, at 8:23 AM, loki911 wrote:

    What do you think the possibility is of a takeover/buyout or a JV is for Celldex? In your opinion would it have to be some sort of dilutive financing?

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