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." 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, in the midst of a market meltdown, one of the best value investors on the planet rushes to the barricades and bellows forth: "These stocks are cheap!," then urges investors to charge against the tide, and pick up five of the biggest names on the market?

As for me, I listen up. And I'm astonished to hear that Standpoint Research has just taken the "unprecedented during our seven years in business" move of recommending five stocks at once, all on a single day, following the market's multi-day, Euro-meltdown-inspired sell-off. And the best news of all? The analyst making these recommendations is literally one of "Wall Street's Best" investors.

The ratings
This morning, Standpoint upgraded to "buy" a total of five separate stocks: Accenture (NYSE: ACN  ) , Dell (Nasdaq: DELL  ) , Hewlett-Packard (NYSE: HPQ  ) , Teva Pharmaceutical (Nasdaq: TEVA  ) , and Xerox (NYSE: XRX  ) .

In keeping with its record as a value-focused investor, Standpoint says it felt compelled to upgrade the shares of these leading lights for one key reason: Their "valuations are more reasonable." And for one reason more: "four of these five names are actually low-beta." In other words, these are not just opportunistic buys based on low-swinging fruit. These are solid companies that generally don't move as wildly as the broader market -- meaning when they're cheap, they really are cheap.

The valuations
All together now: "How cheap are they?" Well, it varies. Today we're going to look at Standpoint's top five picks under the equation first laid down by legendary value investor John Neff.

Writing in his classic work, On Investing, Neff once described the deceptively simple formula he used to beat the market over his more than 30-year tenure at the helm of the Windsor Fund. He called it the "total return ratio," and basically it goes like this: When a stock's projected long-term growth rate plus its dividend yield is greater than the stock's P/E, the stock is cheap and should be given real buy-consideration. Viewed from that light, here's how Standpoint's five picks stack up:

Company

P/E

Dividend Yield

Projected Growth Rate

Total Return Ratio

Accenture

16.8

1.9%

11.2%

0.78

Dell

20.5

-

10.7%

0.52

H-P

14.1

0.7%

11.8%

0.89

Teva

22.0

1.2%

13.2%

0.65

Xerox

22.8

1.8%

10%

0.52

P/E and dividend yields courtesy of Yahoo! Finance. Projected growth rates courtesy of Capital IQ, a division of Standard & Poor's.

And yet, when you look at these stocks this way, I'm not really sure where Standpoint sees the value here. While Standpoint says the stocks are reasonably priced -- or to be precise, "more reasonable" than they've been priced recently -- none of them look particularly cheap. For that matter, Dell and Xerox appear downright expensive.

The record
Purchasing stocks with help from this formula helped John Neff "beat the market" for more than three decades running. More than "beat", in fact. He simply crushed the market, exceeding the S&P 500's returns by roughly 3.1% per year, on average, over 31 years of investing.

Will Standpoint's picks fare as well? I'm not so sure. On the one hand, over the more than three years that we've been tracking the analyst's performance, Standpoint has put up a record even better than Neff's (albeit over a shorter time frame), beating the market with 56% of its recommendations, and exceeding the market's returns by an average of 13 percentage points per pick.

Foolish takeaway
But it's the other hand that worries me. Deviating from the Master's advice may put this young Jedi on the path to the dark side. I'm all in favor of buying cheap stocks. But first -- run the numbers, and make sure they really are cheap.

Disagree? Hey, feel free. If you think there's reason to own any of these five, we've got a place to state your case: Motley Fool CAPS. Click over, make your recommendations, and discover how well you stack up against the best of the best.

Accenture is a Motley Fool Inside Value recommendation. Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 405 out of more than 160,000 members. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (6)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1188573, ~/Articles/ArticleHandler.aspx, 9/2/2014 10:42:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement