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.

Oil, huh?
News that Freeport McMoRan Copper & Gold (NYSE: FCX  ) has decided to turn itself into "Freeport McMoRan Copper, Gold, Oil, and Natural Gas" certainly got investors to wondering yesterday. (Wonder No. 1: Who came up with this harebrained idea?!) But could there be something to the copper-mining giant's sudden interest in oil and gas?

One analyst thinks so. No sooner had Freeport's deal been announced, than megabanker UBS developed a sudden interest of its own in oil stocks, initiating coverage of not one, not two, but nine separate oil and gas plays -- and recommending several of them to investors. Among the Swiss banker's favorites are: Concho Resources (NYSE: CXO  ) , Continental Resources (NYSE: CLR  ) , Cobalt International Energy (NYSE: CIE  ) , Whiting Petroleum (NYSE: WLL  ) , and Kodiak Oil & Gas (NYSE: KOG  ) -- each now rated a "buy" by UBS.

But do any of these stocks really merit their endorsements? Let's take a look:

 

P/E Ratio

Growth Rate

Free Cash Flow?

Dividend?

Concho

31.0

13.9%

None

No

Cobalt

Negative

Unknown

None

No

Continental

33.5

29.3%

None

No

Whiting

13.4

14.5%

None

No

Kodiak

34.4

50%

None

You guessed it. No.


Fun with numbers
Now, a few things jump out at us right away from this table. Most notably, the fact that despite having the highest P/E of the bunch, Kodiak Oil & Gas looks like it might be buyable based on its also having the highest growth rate of the group. For P/E/G investors, that's an attractive proposition.

PEG investors might also see much to like in the sub-1.0 ratio at Whiting, and the near-1.0 ratio at Continental. Concho looks less attractive, of course. Cobalt, meanwhile, with no earnings and no analysts going on record with long-term growth predictions, is the biggest black box of the bunch -- perhaps the reason that, when asked to make a case for the company this morning, the best one an Oppenheimer analyst could say about it was that Chevron (NYSE: CVX  ) might take a gamble and buy Cobalt out, salvaging shareholders from a money-losing investment.

Less-fun numbers
That said, it's hard to avoid the conclusion that UBS is making some less-than-stellar calls this week. PEG ratios notwithstanding, the table above is equally clear on the risks of investing in these stocks. None of them pay dividends. Most are heavily in debt. None of them -- not one -- is generating any free cash flow whatsoever, no matter that GAAP accounting standards inexplicably allow them to claim they're earning "profits."

(And for anyone who thinks generating free cash flow isn't important so long as a company says it's profitable, I've got two words for you: Chesapeake Energy (NYSE: CHK.)

Meanwhile, as these debt-laden companies continue to ladle on more debt, burning cash and generating phantom "profits" while they wait for energy markets to turn around, analysts at Canaccord Genuity report this morning that an oil "oversupply imbalance this year has been largely masked by non-recurring storage demand. As this demand fades, OPEC is likely to find it necessary to withdraw excess supply over the next year to maintain market balance in '13/'14."

Foolish takeaway
An improvement in the global economy could fix that by boosting demand but, with China's growth rate in trouble, and the U.S. facing a fiscal cliff, I wouldn't recommend betting on the economy perking up any time soon. Failing that, investors in these cash-burning enterprises can only trust that analysts are right, and that there are more "greater fools" of the sort Freeport McMoRan has shown itself to be, lurking in the wings, waiting for a chance to buy cash-burning oil firms, and bail investors out of their ill-advised investments.

If you're on the lookout for some better energy plays, check out the Motley Fool's 3 Stocks for $100 Oil. You can get free access to this special report by clicking here.


Read/Post Comments (2) | Recommend This Article (6)

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 December 07, 2012, at 11:35 AM, jjed88 wrote:

    I agree with most, if not all of your comments. I'm currently invested in KOG and would like to mention that they anticipate to be cash flow postive by the end of the year. Things can change before then but I am optimistic that they will be.

    I see you've given them a '4 Star' rating. With your harsh comments I happy to see that.

    GL

  • Report this Comment On December 08, 2012, at 9:33 PM, kthor wrote:

    KOG insider 230k shares sold the last 2 weeks, possible more coming weeks ...i will wait for pullback to buy if you're thinking about it

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