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." 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 best...
On a generally "green" day for stock markets, yesterday, investors in natural gas engine designer Westport Innovations (Nasdaq: WPRT  ) were grinning even wider than most, and enjoying a near-3% gain. Why? For the second day in a row, their stock got a round of applause from Wall Street.

On Tuesday, as you may recall, analysts at CIBC upgraded Westport had upped their recommendation on the stock to "sector outperform." That rating's as good as it sounds, but just in case anyone wasn't entirely clear about what "outperform" means, Swiss banker UBS made the argument crystal clear yesterday. Initiating coverage of Westport with a full-on rating of "buy" -- and a price target of $38 a share -- UBS essentially promised a one-year 25% profit to anyone who follows their advice.

But is that really the way things will work out?

Let's go to the tape
Initial indications look good. Here at CAPS, we don't have any hard data on how CIBC's recommendations have performed over time, but we do have a track record for UBS. What it tells us is that over the six years that we've been monitoring this analyst's performance, the Swiss bankers at UBS have outperformed about 92% of investors globally. Also to its credit, it turns out that UBS is one of only a handful of analysts who actually beat the market on the majority of their picks.

That said, there is one chink in UBS's armor, and one sector of the market they don't seem quite capable of getting a firm handle upon: auto components.

A major caveat
That's an important caveat for Westport investors, of course, because Westport just happens to be located squarely in the middle of the auto parts market, developing natural gas engine technologies that go into truck engines made by Cummins (NYSE: CMI  ) , among others. When investors consider whether to follow UBS's advice, therefore, they might find it "interesting" to know that within the auto components industry, UBS actually gets only about 29% of its stock picks right.

This record of underperformance in auto parts may be of some concern to Westport fans, because you have to admit: This is not an easy company to value. Not an easy stock to pick a good entry price for buying.

Westport has no profits, for example, and therefore has no P/E ratio to gauge it by. It's got sales, of course, but so few, and at such a high valuation, that the stock's price-to-sales ratio of 4.3 looks completely out of whack next to the 0.3 times price-to-sales ratios more common in this industry. And yes, with a growth rate projected to average 30% per year over the next five years, Westport is growing faster than the average auto components company. But, with only negative profits to multiply that growth rate by, it's hard to say precisely what the analysts are saying will grow. (Losses?)

Foolish final thought
One thing we know for sure is growing at Westport, and that's cash burn. In recent quarters, Westport's stellar growth in operating cash flow appears to have stalled, while capex continues to grow unabated. At its current rate, Westport is on pace to burn through more than $66 million this year. And while Westport boasts a bank account plump with enough cash to sustain this burn rate for several more years, it's hard to know how long investors will stick around, with no profits to show for it.

Analysts believe that Westport will report its first annual profit in 2014. If management can maintain momentum, and reassure investors next year that everything's still on track for a fiscal 2014 profit -- well and good. UBS may be proven right, and Westport could indeed hit the banker's new price target in 2013. If, on the other hand, Westport "pulls a Tesla (Nasdaq: TSLA  ) ," and is forced to tone down its happy talk in the face of technological snafus, as the California electric-car maker had to do last month, things could get ugly in a hurry.

When it comes to story stocks like Westport and Tesla, Wall Street is no big fan of plot twists that threaten to derail a happy ending. If you're looking for a stock with more mojo and less risk of a letdown, check out our new report on the three stocks to own for the new industrial revolution.

Fool contributor Rich Smith is neither long nor short any stock named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 274 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Tesla Motors, Westport Innovations, and Cummins. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Cummins, and Tesla Motors.

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


Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2012, at 7:06 PM, carllyn wrote:

    If this article gives an accurate picture of WPRT, why was it a buy recommendation around $40 earlier this year?

  • Report this Comment On October 09, 2012, at 2:01 AM, TMFDitty wrote:

    Different Fools have different opinions of Westport. I've never been particularly enthused by it, but others like it -- quite a few others, judging from its 5-star rating on CAPS.

    TMFDitty

  • Report this Comment On October 09, 2012, at 4:40 PM, Haiphen wrote:

    I was foolish (small f) enough to buy at $44 because I liked the story for growth potential, and still do.

    I simply overpaid. I wont make that mistake again.

    From now on it's growth at a reasonable price or solid companies at a great price.

    I might buy some more to average down, but I'm not sure I want more exposure to it.

    MF has an eye for good companies and I've made money with some of their recommendations, but you need to reduce risk and buy only the ones trading at a discount.

    Wait for the expensive ones to make an earnings miss or another bump and they take a big tumble to buy on.

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