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This Just In: More 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 up the prospects for Energy Transfer Partners (NYSE: ETP  ) and Citigroup (NYSE: C  ) , but talking down IBM (NYSE: IBM  ) . Let's find out why.

Don't curb your enthusiasm -- "transfer" it
If there's one thing Americans learned from last night's presidential debate (other than that an hour-and-a-half is only enough time to ask and answer about a half-dozen questions), it's that natural gas is making up more and more of America's energy production. This being the case, it's natural to ask: Which companies are best positioned to profit from the tidal shift in our energy sources?

Imperial Capital attempted to answer the question this morning, as it switched around its ratings on two of the biggest names in fuel shipment: Kinder Morgan Energy Partners (NYSE: KMP  ) , and Energy Transfer Partners. Kinder, formerly a buy at Imperial, has just become a sell. Conversely, the analyst is now telling investors to buy the formerly sell-rated Energy Transfer Partners.

Why? It's not entirely clear, as no major media outlets seem to have details on Imperial's thinking regarding the two stocks -- just reporting that the ratings happened, full stop. (It is interesting, though, to see that just last night, CNBC's Jim Cramer made a similar call on Kinder Morgan, urging investors to dump the stock.) What we do know for sure, though, is this: While both companies report themselves to be GAAP "profitable," currently Kinder Morgan is generating real cash profits at the rate of more than $1.5 billion per year. Energy Transfer, in contrast, burned more than $500 million in free cash over the last 12 months.

My take: Numbers don't lie. And Energy Transfer is no buy.

CEO out, Citi up
Investors in banking giant Citigroup were shocked to the core yesterday when it was announced that CEO Vikram Pandit has been ousted from the company in a boardroom coup. Prior to the ouster, Citi looked like no great bargain at a P/E ratio of more than 16, and a growth rate of just 12%. One analyst, though, is betting its reputation that a Pandit-less Citi may be able to do a whole lot better than that respectable, but modest, growth rate.

This morning, reported that investment banker CLSA has switched its recommendation on Citi stock all the way from underperform to buy in response to the news. More than that, CLSA now thinks the stock could hit $43 a share within a year. (Previously, CLSA was looking for $30.)

On the one hand, it's hard to see how a mere change in CEO can translate into the 33% improvement in growth rate (that would be necessary to bring Citi stock up to a PEG ratio of 1.0). On the other hand, though, investors might not want to bet against CLSA being right about the turnaround working out. After all, according to our CAPS records, CLSA has made two similar stock picks in the past couple months. In September, CLSA picked each of Morgan Stanley and Goldman Sachs to outperform the market, and each has done so -- in spades. Bet against Citi to follow suit at your own risk.

IBM -- a bellwether pointing down?
Last but not least, we turn to IBM, and its underwhelming earnings report, which came out last night. Big Blue is taking a beating this morning, as Wall Street moves to downgrade the stock.

So far this morning, we've seen Janney Montgomery Scott slash its rating from buy to neutral, and cut $16 off its price target. Investors might take some comfort in the fact that at $209, Janney is still seeing room for some upside at IBM (which costs just $199 after today's near-6% slide). On the other hand, not all analysts are as optimistic. Wednesday morning also saw analysts at Societe General slash their rating to sell -- and SG only sees IBM as worth $188, so $11 downside from today's price.

Who's right? Well let's see. At today's new-and-improved market cap, IBM currently sells for about 14.3 times trailing earnings. That hardly seems a lot to pay for one of the world's great tech stocks. On the other hand, most analysts think IBM is going to max out at about 10% annual profit growth over the next five years. Even with its modest 1.6% dividend yield, and even after today's stock-price rollback, this suggests the stock is no great bargain. Add in a heaping helping of debt -- IBM owes $21 billion net of cash on hand -- and the stock's arguably even more expensive than it looks.

Long story short: IBM took a tumble today. That doesn't mean it doesn't have farther to fall.

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Whose advice should you take -- mine, or that of "professional" analysts like Imperial Capital, CLSA, and Societe General? 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. 298 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Citigroup Inc and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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10/24/2016 4:00 PM
C $49.58 Up +0.01 +0.02%
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