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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
What do you do when one of the biggest names in investment banking tells you it's time to buy one of the biggest underperformers in the market? Personally, I listen up. And from what I hear JPMorgan thinks now's the time to buy Melco Crown Entertainment (Nasdaq: MPEL ) .
It's not at all an obvious call. Over the past year, shares of Melco have lagged the stock market by a good 24 percentage points. Over the last five years, they've done nothing but vaporize shareholder wealth, as the company's stock dropped from above $20 to less than $5 a stub. But according to JP, this precipitous decline has left Melco trading at a steep discount to Macau peers Wynn Resorts (Nasdaq: WYNN ) and Las Vegas Sands (NYSE: LVS ) . Both of these worthies sell for more than three times their annual revenues, and more than two times book value, versus Melco's meager sub-two P/S ratio and its valuation of just one times book.
The more things stay the same, the more they're likely to change
JPMorgan thinks that Melco's due for a change. Leveraged to the "robust gaming environment in Macau," boasting "improving liquidity" on its balance sheet, and with "achievable/beatable near term and longer term Consensus EBITDA estimates" -- JP sees the stage set for Melco's outperformance this year. JP's so confident in its theory, in fact, that it boosted its target price on the stock a full 40% this morning, predicting the shares will hit $7 within the next 12 months.
JP rushes in where Fools don't fear to tread
Good news, right? After all, Motley Fool Global Gains has recommended buying Melco Crown, too, so we should be thrilled to hear that JP's now on our side. And well we might be ... if not for JP Morgan's abysmal track record in the Hotels, Restaurants and Leisure industry:
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Companies
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JP Said
|
CAPS Says
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JP's Picks Lagging S&P By
|
|
Boyd Gaming
|
Underperform
|
**
|
12 points
|
|
International Game Technology (NYSE: IGT )
|
Outperform
|
*****
|
21 points
|
|
Ameristar Casinos
|
Outperform
|
**
|
20 points (two picks)
|
|
Las Vegas Sands
|
Outperform
|
**
|
66 points
|
Now I don't mean to pick on JP too much. Fact is, across the many, many industries it covers, this banker ranks in the top 15% of investors we track on CAPS, and has made some notable successes (in industries other than gaming). Its 2007 CNOOC (NYSE: CEO ) recommendation, and last year's endorsement of Chesapeake Energy (NYSE: CHK ) , have both beat the market soundly. Why, JP even hit the jackpot once in gaming, predicting MGM Mirage (NYSE: MGM ) would beat the market last year, and profiting as it did just that.
But when it comes to gambling stocks, JPMorgan is a four-time loser ... and so is Melco Crown.
Always bet on black (except at Melco)
The sad fact is, that when gambling on Melco, your best bet is "red." Income statements bathing in red ink. Cash flow statements that bleed the stuff.
For as long as anyone can remember, this company has done nothing -- literally, nothing -- but rack up losses for its shareholders. $566 million in accumulated losses over the past five years. $2.8 billion in negative free cash flow. And not a penny of profit to show for any of it.
Foolish takeaway
JPMorgan may be right about the company being "undervalued" relative to its peers. It's certainly right that Melco carries price-to-sales and price-to-book ratios far beneath those of Wynn and Las Vegas Sands. What sets Melco apart from these two gambling legends, however, is that they've proven themselves capable of occasionally turning a profit on their business. Melco has not.
My advice: Until it proves otherwise, bet on Melco to stay in the red.
Melco Crown's stock has lagged the market badly over the past year. How do you tell a bargain stock from a value trap? Find out here.
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