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's talking up prospects for oil prospectors Chevron (NYSE: CVX ) and Kodiak Oil (NYSE: KOG ) . On the other hand, analysts aren't nearly so optimistic about Valero Energy (NYSE: VLO ) . Let's find out why.
Gushing over oil...
Happy days are here again for investors in oil giant Chevron, recipient of a big upgrade to "market outperform" (that's "buy" to you and me) from the analysts at Howard Weil. According to Weil, Chevron is bound for $135 a share -- a 14% increase over today's price of $118 per share.
Of course, even the $118 is already pretty good. This stock, as you may have heard, hit an all-time high in Friday trading, before falling back a bit. Today, it's one of only a very few oil stocks doing well -- a function both of the Weil upgrade, and Chevron's own objectively attractive valuation. Priced at less than nine times earnings, Chevron pays its shareholders a tidy 3.1% dividend yield.
The stock still is not a slam-dunk, though. Ordinarily, you'd want to see about a mid-single-digit-growth rate to support this kind of P/E ratio. Instead, most analysts appear to believe that Chevron's growth has peaked, and it's likely to average 0% earnings growth over the next five years. If zero growth (and a nice dividend) is good enough for you, then by all means -- buy Chevron. Here at the Fool, though, we think you can probably do better. Read our new report on the oil industry, and discover three better bargains in a world of $100-a-barrel oil.
...but not all oil
Another oil stock getting the nod from Wall Street today is Kodiak Oil & Gas. This morning, analysts at Wunderlich Securities got about 20% more positive about the stock (which they were already recommending), and upped their price target on Kodiak to $12 a share.
Why? Good question. Nobody in the mainstream media seems to have much detail about why the new and improved price target happened. It probably has something to do with ExxonMobil's (NYSE: XOM ) decision to buy assets from Denbury Resources (NYSE: DNR ) last week, however. Commenting on Exxon's acquisition last week, Wunderlich opined that based on the price Exxon paid, Kodiak's Williston Basin holdings could be worth "between $13 and $15 a share."
And yet... if just this piece of Kodiak is worth $13-$15, the question arises: Why target a price of only $12 a share for all of Kodiak?
Two answers suggest themselves: First, even if Kodiak is worth "X" then there's no guarantee that a buyer will emerge and offer to pay $X to acquire the company. Meanwhile, while technically profitable under GAAP accounting standards, Kodiak remains deeply in the red from a free cash flow perspective, burning through cash at the rate of more than $1.2 billion per year. With almost no cash in the bank, and more than $800 million of debt already, the company's not really in any position to wait around for a full-price offer. If Kodiak doesn't start generating cash soon, or sell out sooner, the company will have to resort to a dilutive equity issuance in order to keep the doors open. Thus shares that are worth $13 or more today, could soon be worth only $12 (or less).
...and not over this oil refiner
Lastly, and with apologies for ending on a down note, we come to Valero Energy, and the downgrade it just received from Argus Research. Citing "valuation" as its primary concern, Argus pulled its buy recommendation on Valero Monday, downgrading to "hold."
Now, this recommendation flies in the face of the upgrade that stock shop Simmons gave Valero last month -- but it aligns perfectly with my own thoughts on Valero. Last month, I said the company was bargain at a share price 10.3 times trailing earnings. At today's price of 11.5 times earnings, it's even less a bargain.
Sure, Valero pays a nice dividend (2.7%). But, with a projected growth rate of less than 7% per year over the next five years, the stock's still too expensive for the amount of earnings it's producing. When you consider further that Valero actually generates only about $0.80 in cash profit per dollar of "net income" that it reports, the stock's even more expensive than it looks. I wouldn't necessarily go out and short it, mind you... but Argus is right. It's definitely too pricey to buy today.
Whose advice should you take -- mine, or that of "professional" analysts like Howard Weil, Wunderlich, and Argus? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.