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 ...
Shareholders of Chilean mining superstar Sociedad Quimica y Minera (NYSE: SQM ) are enjoying a day of gains on Wednesday. For this, they can thank the friendly folks at Deutsche Securities. Perhaps fearing it would get snowed in if it waited, Deutsche chose to deliver an early Christmas present to SQM investors, setting a $63 price target on this $53 stock, and starting the shares at "buy."
But why? I mean, according to Yahoo! Finance, what we have here is a 41-times-earnings stock that's set to grow over the next five years at the breakneck pace of -- wait for it -- 0.2% per year. (Yes. As in two-tenths of one percent.) That hardly seems a bargain in the fertilizer space, where companies like Agrium (NYSE: AGU ) , Mosaic (NYSE: MOS ) and Potash (NYSE: POT ) regularly sell in the low-to-upper 20s for P/E, and sport far faster growth rates. Why buy SQM, when there are so many better bargains out there?
Well, for one thing, because Yahoo's data is wrong. Or, at least according to Deutsche, it's ultra-conservative. Citing SQM's "continuous expansion in the of potassium chloride and potassium sulfate markets, continuing cost-cutting efforts, and recovery in global fertilizer demand," Deutsche believes that far from just getting by on a sub-1% growth rate, SQm's poised to post 20% compound annual profit growth over the next five years. (20%, 0.2% … maybe Yahoo misplaced a decimal?)
And that's just the beginning of the growth story here. By now, you've probably heard all about the new lines of electric cars coming out from the likes of Ford (NYSE: F ) , General Motors (NYSE: GM ) , and Tesla (Nasdaq: TSLA ) -- not to mention the Nissan "Leaf," which actually began arriving on dealer car lots a few days ago. Or the electric cars from Mitsubishi, from BYD, from Fisker … you get the picture.
Well, here's the thing: A lot of these electro-buggies are being designed to run on lithium-ion batteries, rather than the today-more-common nickel metal hydride formulation. And wouldn't you know it? SQM just happens to be one of the biggest producers of lithium on the planet. Deutsche puts SQM's global market share in lithium at 30%, and predicts "strong growth in lithium demand in coming years as hybrid electrical vehicles go mainstream." Toss in a wild card in the form of "a new application for SQM's nitrate production," which can be used to store thermal energy at the multiple new solar energy plants going on line, and according to Deutsche, you've got yourself one heck of a buy thesis right there.
What you need to know
Now, if you've been watching this stock on CAPS, chances are you already know all of this. You know SQM's a popular stock -- it's got a Fool straight flush, five-star rating on CAPS, for goodness sakes! But here's something you may not know: In addition to all the individual investors who like it -- some good, some bad -- this new institutional fan has quite a strong record of picking winning stocks in the Chemicals industry:
(out of 5)
Beating S&P By
||149 points (!)
In fact, over the four years we've been tracking Deutsche's performance in Chemicals, the analyst has racked up a simply sterling record of 61% accuracy on similar picks. In short, if there's anyone you want to listen to for advice on SQM, it's probably Deutsche.
And yet ...
If Deutsche is such a great stock analyst, and so especially skilled in picking Chemical companies, you may wonder why is it that I won't be following its advice today?
The answer is this: Quite simply, the numbers don't work. Oh, I admit Deutsche is probably right about the steepening demand curve for lithium. It may be right about the solar stuff, and the fertilizer growth trends as well. But even if Deutsche is right about all this, I still don't see how it can justify buying a 20%-grower of a stock for 41 times earnings. The more so when you dig deeper into SQM's financials. There we find that this company that earned $344 million over the past year in fact generated only $222 million worth of actual free cash flow (giving it a nosebleed price-to-free cash flow ratio of 63.)
For that reason, I have to advise you to pass on this one, Fool. Sometimes, no matter how great a company's prospects, and how savvy the analyst recommending it, it just plain costs too much. Sadly, that's the case with Sociedad Quimica y Minera today.