Upgrades and Downgrades: E-Commerce Edition

Worldwide Invest Better Day 9/25/2012

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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the worst ...
Investment banker Cantor Fitzgerald is a big name on Wall Street, and last week, it made a big splash among investors. Wading into the e-commerce arena, this analyst fired off a string of buy/sell recommendations that was 18 stocks-long -- including nearly a dozen buy ratings. But are any of them worth considering?

Let's take a look:

Stock

P/E Ratio

Price-to-Free-Cash-Flow

Growth Rate

Ancestry.com (Nasdaq: ACOM  ) 20 11 14%
Amazon.com (Nasdaq: AMZN  ) 314 106 32%
Expedia (Nasdaq: EXPE  ) 24 9 12%
Facebook 127 86 27%
Google 22 19 17%
Netflix 32 58 18%
Priceline.com 26 23 22%
CafePress 102 30 21%
ValueClick (Nasdaq: VCLK  ) 13 11 14%
VistaPrint (Nasdaq: VPRT  ) 32 14 19%

Source: finviz.com.

What the numbers tell us...
As you can see, in today's chart I've emphasized stocks where the price-to-earnings ratio is higher than the long-term earnings growth rate that Wall Street expects to see (making the stock a no-go for PEG investors). And as you can see, this includes the majority of the stocks that Cantor curiously recommends buying. Among those, Amazon.com and its 314 P/E present a particularly egregious example of investors overpaying for a pipe dream.

Of course, just because a stock has a high P/E ratio doesn't necessarily mean it's overpriced. To illustrate, note the the few companies where Cantor may be onto something -- where the company is generating significantly more "cash profit" than it's allowed to report as "net income" under GAAP accounting standards. Ancestry.com (a stock that the Fool has recommended, and that I own myself) is one such company. Expedia, ValueClick, and VistaPrint are three more stocks that may be cheaper than meets the eye.

...and what they don't
Now a word to the Foolish: The table up above offers you a guide to which stocks on Cantor Fitzgerald's shopping list may deserve a closer look. It's not, however, a surefire guarantee that these stocks will outperform the market. Any number of things can go wrong with this thesis. For example, a company could grow faster (or slower) than analysts currently believe it will. This would obviously affect the calculus of the buy-sell decision significantly.

Alternatively, a company like ValueClick or VistaPrint, currently generating strong free cash flow, could come upon hard times and report a weak FCF quarter. Or free cash flow could simply fail to grow at the same pace as earnings are expected to grow. (In theory, earnings and cash flow should track closely together over time, but it doesn't always work out this way.)

Foolish final thought
So why bother investing this way at all? Because while the future is uncertain, and the chances of profit rarely clear, I've found that this method does work well over time. For six years now, I've practiced what the Fool has promised, and publicly posted my stock recommendations on CAPS for Fool disclosure.

How has this worked out? To date, 73% of my recommendations are beating the market (versus 43% for Cantor Fitzgerald). This, to me, speaks volumes. It tells me that when you invest in growing companies selling for low P/E ratios, and particularly low P/FCF ratios, your investments do indeed tend to beat the market over time.

Will they continue to do so? Keep tabs on my performance here, and if you see me picking a stock, or making an argument that doesn't seem to jibe with this value investing philosophy -- keep me honest. Feel free to comment, email, or post a note on my CAPS page, and let me know if you think I'm making a wrong call.

In the meantime, in-between-time, enjoy a trio of premium research reports on some of the most popular stocks now on Cantor's shopping list. Read what Fool analysts have to say about:

Fool contributor Rich Smith owns shares of Ancestry.com. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 293 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Ancestry.com, Google, Netflix, Priceline.com, Facebook, and Amazon.com. Motley Fool newsletter services have recommended buying shares of VistaPrint, Facebook, Amazon.com, Google, Priceline.com, Ancestry.com, and Netflix. Motley Fool newsletter services have also recommended creating a bear put ladder position in Netflix.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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Related Tickers

12/31/1969 7:00 PM
ACOM $0.00 Down +0.00 +0.00%
Ancestry.com CAPS Rating: ***
AMZN $332.63 Up +2.09 +0.63%
Amazon.com CAPS Rating: ***
CMPR $63.72 Down -0.88 -1.36%
Cimpress CAPS Rating: **
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EXPE $84.69 Down -1.39 -1.61%
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