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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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So 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.
Bright and early this morning, in the wake of last week's sell-off, Street analysts decided to go shopping. We'll look at three of their new buy ratings today, for DryShips (Nasdaq: DRYS ) , Linn Energy (Nasdaq: LINN ) , and Aastrom BioSciences (Nasdaq: ASTM ) . Let's dive right in.
DryShips: Finally seaworthy?
With their stock up 5%, shareholders of dry bulk shipper DryShips were cheering this morning -- and cheered, too, by the initiation of the company at "buy" by Global Hunter Securities. With the shares down 41% over the past year, is it now finally time to clamber back aboard this incredibly leaky boat?
Sure, the stock looks cheap at 8 times next year's projected earnings, but DryShips is still far from a safe port. The company's mired in debt -- more than $4 billion net of cash, at last count. The Baltic Dry Index, to which DryShips' fortunes are tethered, has bounced back from recent lows, but it began dipping again earlier this month and has flatlined in recent weeks. Plus, if memory serves, DryShips is still based in Greece. Hardly the most stable place to be doing business these days.
When you consider all this, and add the fact that DryShips is still burning cash, and hasn't been truly free cash flow-positive but once (and then only briefly, in 2009) in the past five years, and Global Hunter's prediction that the shares will nearly triple to hit $6 within a year seems more fantasy than reality.
Should you toe the Line?
And speaking of cash-burning, debt-laden companies: Linn Energy. The independent oil and gas company just got initiated at "buy" by MLV & Co., which according to StreetInsider.com is positing a $42 target price on Linn shares within one year's time.
But while less aggressive than Global Hunter's prediction ($42 would make for just a 16% profit from today's prices), MLV's prediction looks no more substantiated. Not a single major media outlet has details on MLV's recommendation, meaning that as individual investors, we're forced to work based only on the numbers we've got.
And yes, at first glance, the numbers do look promising. Linn shares cost only 7.5 times earnings today, versus long-term growth predicted to average 6% over the next five years. Dividends are an even greater attraction, of course, with Linn yielding more than 8% a year. The question remains, however, whether Linn is going to be able to sustain this payout when all it has in the bank (at last report) is a measly $24 million, against more than $4.9 billion in debt, and a record of burning cash at a rate approaching $300 million per year over the past 12 months.
Suffice it to say the odds don't look good on this one. While there are stocks out there that can make a lot of money from $100-a-barrel oil (and we've found three of them), Linn isn't one of them.
Stem cells for everyone!
Last and least, we come to Needham & Co., and the two stem-cell stocks it decided to recommend investors buy this morning: Aastrom BioSciences and Pluristem.
In several respects, the recommendations are similar. Whereas Geron (Nasdaq: GERN ) -- the former poster boy for controversial stem-cell research -- gave up on stem-cell research last year, these two companies are still plugging away at it. Both companies are targeting phase 3 trials for bet-the-company drugs aimed at treating critical limb ischemia -- ixmyelocel-T for Aastrom, and PLX-PAD for Pluristem. Both companies have amassed close to $40 million in cash to help fund their efforts. The critical difference here is how fast they're burning through this cash.
Specifically, with a cash burn-rate of more than $25 million per year, Aastrom is only about 18 months away from needing to find a new cash infusion. Pluristem's $6 million burn rate, in contrast, gives it significantly more breathing room.
Neither stock is a slam dunk by any means. To the contrary, each company looks pretty pie-in-the-sky to me, with price-to-sales ratios in the three and four digits, and no chance of profits in the foreseeable future. If you're willing to invest in bleeding-edge medical science, though, and aren't dissuaded by seeing the pioneer in the industry (Geron) walk away from its stem-cell program, then at the very least, I think you'll lose less money, and more slowly, by investing in Pluristem rather than Aastrom.
Whose advice should you take -- Rich's, or that of "professional" analysts like Global Hunter, MLV, and Needham? Check out his track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.