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.

Who's hot, who's not -- in energy
Which companies will dominate the future of energy? Will it be old-line, developed-world oil-and-gas companies? Rising oil powers in the emerging market? How about the even trendier field of "alternative" energy, represented by solar power and rechargeable batteries?

Yesterday, Wall Street placed new bets on all three of these ideas. Here's what the bankers had to say about:

SandRidge Energy (NYSE: SD  )
When it comes to one oil-and-gas play, black gold may turn out to be fool's gold -- at least in the opinion of BMO Capital Markets, which yesterday downgraded shares of SandRidge Energy. Although the company has been making moves to lighten its dependence on natural gas and focus more on oil exploration, BMO says the stock is still "significantly overvalued" for its prospects. Indeed, while investors yesterday bid the shares up by nearly 2% (to $5.84), BMO think they're headed the other way -- and assigns the stock a $2 price target.

I agree. Not necessarily with the $2 price target, mind you. I don't know what the stock is worth. What I do know, though, is that it's not worth 31 times earnings. Not with a 7% growth rate, no dividend, and a consistent record of burning cash  when it should be generating cash for its shareholders, it isn't.

My hunch: This stock is worth a whole lot closer to $0, than to the nearly $6 a share investors are currently paying for it.

Petrobras (NYSE: PBR  ) (NYSE: PBR-A  )
So, how about an oil stock a bit farther off the beaten path than North America? Brazilian oil giant Petroleo Brasileiro -- "Petrobras" to its friends -- scored an upgrade to "outperform" from the analysts at Credit Suisse Thursday, and a price target of $25 to boot. CS likes the company's move to raise the price on the diesel it sells and thinks this might be the catalyst that marks an "inflection point" in the stock.

Unfortunately, I'm compelled to differ here. Sure, on the surface, Petrobras shares look attractive -- I mean, P/E ratio of 12, 15% growth rate, and a 1.3% dividend? What's not to like? -- if you drill a little deeper, there's actually some pretty glaring problems with an investment in Petrobras.

Problems like the fact that much like SandRidge, Petrobras hasn't generated one red cent worth of real free cash flow in the past five years. And the fact that with no cash coming into its coffers, Petrobras has had to fuel its 15% growth rate by piling on debt. The company's currently $72.4 billion in hock (net of cash on hand), and the debt hole's getting deeper by the day.

In short, Credit Suisse's endorsement notwithstanding, I wouldn't touch this one with a 10-foot drill bit.

MEMC Electronic (NYSE: SUNE  )
Next up, the wave of the future that wasn't: solar power. Prices on solar modules are down around the globe, and basically, no one is making money in this business... now. But according to the analysts at Goldman Sachs, this is just a temporary phenomenon. According to Goldman, MEMC's basic semiconductor business is "steady-growth, cash-flow positive," and worth $5 a share all on its own. If and when the solar biz ever turns around, therefore, buying a share of MEMC, which costs today only what the computer chip business alone is worth, gives you a "near-free call option" on a revival in solar.

I only wish I could agree. Unprofitable today and carrying $1.8 billion in debt-net-of-cash -- $500 million more than its own market cap -- MEMC Electronic is waltzing its way down the road to ruin. Even if one segment of its business is "cash-flow positive," the company as a whole is generating negative cash flow. Factor in capital spending and the company burned nearly $750 million last year.

Like its "old energy" rivals, MEMC is debt-heavy and cash flow light -- and headed lower.

 Sociedad Quimica y Minera (NYSE: SQM  )
Finally, we come to Chilean lithium miner SQM, whose products are instrumental in the making of lightweight rechargeable batteries, and whose name translates as "Chemical and Mining Company of Chile." SQM disappointed investors Tuesday with a report of $0.54 per share in profit. The good news is that it actually did earn a profit. The bad news is that, according to StreetInsider.com, it earned $0.08 less profit than Wall Street was hoping for.

This performance won SQM a prompt downgrade to "neutral" from analysts at Miller Tabak. Personally, though, I'm even less optimistic than the analyst.

On the one hand, SQM is probably the least overpriced of any stock mentioned in this column so far. Regardless, at 22 times earnings:

  • The stock's overpriced for the 14% annual long-term growth that Wall Street estimates.
  • It failed to grow earnings at all last quarter, shrinking instead.
  • And -- as you can probably guess by now -- free cash flow isn't up to snuff here, either. In fact, the $313 million in cash profits SQM produced last year were less than half its reported $649 million in "net income."

Foolish takeaway
Long story short, I wouldn't buy any of these companies today. Not a single one.

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Read/Post Comments (7) | Recommend This Article (5)

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 March 08, 2013, at 10:50 AM, eyerish62 wrote:

    I believe you are mistaken concerning BMO...they reduced their price target by $2....not down to $2 but down to $4

  • Report this Comment On March 08, 2013, at 11:00 AM, raw1024 wrote:

    You did not listen to the analist meeting if you think the company is worth nothing. Hope not many investors pay you any attention.

  • Report this Comment On March 08, 2013, at 11:18 AM, nonbiasfool wrote:

    PBR is going to be correcting their refinery issues in the next couple of years and thus the 8 billion they are losing via fuel imports will become a non-factor. You got to look down the road and stop living day to day, tick to tick. Sure 2013 isn't going to be filled with great news for PBR, but when they have better refinery capacity and better oil output, you'll be coming on here and saying they are a screaming buy, however, they won't be $17 a share, they will be upper 30s and lot of the cream off the top will be gone.. You need to consider buying when things are "iffY" to really make $$.

  • Report this Comment On March 08, 2013, at 11:55 AM, fireplug12 wrote:

    SD problems is bad management once they are gone this company will be great for investor with all of their great assets

  • Report this Comment On March 08, 2013, at 12:19 PM, kthor wrote:

    SD <>=<> CHK ?

  • Report this Comment On March 08, 2013, at 8:58 PM, Swingtrader888 wrote:

    I agree with "nonbiasfool", gotta add some high-risk and speculation to the portfolio. If everybody made safer bets you wont make any money just pennies.

    Btw I enjoyed that $3 move in two days as a swingtrade :)

    Plus for those novice investors, wannabe traders look at playing options. July calls are very cheap in comparison to buying the shares outright. In the money, near the money gives you plenty of time to get in on this price move.

    As a trader im on-board. You have a catalyst (diesel price hike), Credit Suisse is the cheerleader telling the novice to buy and with all the sellers you have more buyers to buy it up and drive the price up. And you know with over 130+ million shares changing hands in past three days you got institutions and hedge funds starting positions and or adding.

  • Report this Comment On March 09, 2013, at 12:05 PM, navydog11 wrote:

    Very disappointing to read an article claiming that the stock is worth nothing.........without any support. I expect better out of Mötley Fool.

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