This Just In: Upgrades and Downgrades

When one of the worst analysts on Wall Street recommends buying one of the hottest names in tech, what do you do? Do you look for a chance to short a tremendously bad call by Wall Street's wise men? Or do you wonder aloud, "Hey, even a stopped clock..."?

One way or the other, we're going to take a close look today at a big upgrade for specialized semiconductor maker Himax Technologies (HIMX 1.61%) -- and at the banker who made the call: Northland Capital Markets.

News at 11
Bright and early Thursday morning, analysts at Northland announced they are upgrading shares of Himax Technologies from "market perform" (aka neutral) to "outperform" (aka buy!).

According to Northland, Himax shares that currently cost less than $8 a stub will rise as high as $10 over the course of the coming year. Northland's reasoning goes like this: Himax's revenue dropped 25% in the most recent quarter, which was obviously not good news. But Northland sees the "core business" in cell phone display stabilizing, "with handset inventory levels in China so low that rush ordering has begun in small batches." Farther up the value chain, Northland also sees opportunity for Himax in "4K" television display, and sees pricing pressures diminishing (and as a corollary, profit margins expanding) through 2016.

Shares of Himax are already reacting to the good news, with prices up more than 5% already as of this writing. But even so, if Northland's right about its recommendation, there could still be more than 27% profit left in this stock.

Ah, but is Northland right? That's the real question -- so ...

Let's go to the tape
If there's one major flaw in Northland's recommendation of Himax, it may be Northland itself. You see, we've been tracking this analyst's performance for nearly nine years now on Motley Fool CAPS, and Northland's record so far has been, er, not good.

In fact, out of more than 75,000 rated players on CAPS, we've got Northland pegged somewhere in the bottom 20% of ranked investors, with an average accuracy on its picks of less than 42%, and an average return per recommendation that's more than 8% below the S&P 500.

Which is admittedly not a good start. All that being said, while Northland as a whole is far from our favorite analyst on Wall Street, there does happen to be one area of the stock market where Northland simply shines: Semiconductors.

Semiconductors?
Yes, semiconductors. The very sector of the market that Himax calls home. And when it comes to picking semiconductor stocks, Northland's record is simply superb:

17 recommendations made over the past nine years.

65% accuracy on those picks.

And 710 percentage points' worth of market outperformance across its recommendations, including such winners as:

I'll state the obvious now: The fact that Northland boasts a record this good in semiconductor stocks seems very promising for Himax Technologies. That is, of course, if the stock itself looks good. So let's look at that next.

Valuing Himax
Priced at 41 times GAAP "earnings," Himax at first glance seems a very pricey stock. That valuation is skewed however, by the company's aforementioned miserable performance in the third quarter of 2015. While trailing-12-month profits look weak at less than $35 million earned, as recently as last year, Himax earned nearly twice that TTM number -- $66.6 million. Himax also generated positive free cash flow of nearly $83 million last year, according to data from S&P Capital IQ.

Were Himax to repeat that 2014 performance, let's say in 2016 (because Northland is saying that next year will be good for Himax), then at its current valuation, the stock is selling for only about 16.4 times such hypothetical free cash flow. And with analysts on average predicting that Himax will continue to grow its profits at 17% annually over the next five years, that's obviously a very nice valuation.

If Northland is right.

The upshot for investors
Nervous investors, looking for a more economical means of playing a growing smartphone market, might be tempted to gravitate toward something like Skyworks -- a superb winner for Northland in the past, and one with a more reasonable-seeming P/E. (Currently, Skyworks sells for less than 21 times earnings -- about half Himax's valuation. And Skyworks is also pegged for faster growth than is Himax -- 21% annualized over the next five years.)

As for me, however, I have to admit I'm intrigued by the potential for Himax to outperform. If Northland's right about the rebound in 2016, this one could be an even bigger winner.