This Just In: More 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." Here, we'll tell you whether those bigwig analysts actually know what they're talking about. We've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

They're ba-ack ...
For Intel (Nasdaq: INTC  ) , happy days are here again. After a four-month absence from the Intel fan club, ace semiconductor investor Standpoint Research returned to the pep rally yesterday. Intel stock is down 9% since the analyst last downgraded it, against an 8% rally in the S&P 500, and Standpoint's urging investors to take advantage of this laggard performance. With the stock down 1.5% today, now just might be the right time to do so.

The last time Standpoint endorsed Intel, it managed to call the cyclical low pretty well, locking in a 22% gain over just three months' time. Today, the analyst sees a chance "to pick up a 20% gain here ... in the next 12-18 months."

According to Standpoint: "INTC is trading at just 9X estimates for next year. EV/EBITDA is < 5X, with INTC sitting on $22 bln in cash and just $2 bln in debt." To top it all off, the company pays out a "significant" dividend yield of 3.6%.

Let's go to the tape
Crunching all these numbers, Standpoint tells its clients that Intel now ranks third out of the 540 stocks that it currently tracks. That glowing ranking may actually be even better than it sounds. As Standpoint's analyst gushes, "I don't think [Intel] has ever ranked that high during the eight years I have been doing this."

Eight successful years, I should add. By CAPS' stats, Standpoint is one of the very best investors on Wall Street, beating the market with more than 70% of the recommendations it's made over the past five years. In semiconductors alone, an astounding 100% of Standpoint's picks (including both Intel and Volterra Semiconductor (Nasdaq: VLTR  ) ) have trumped the S&P. So when Standpoint tells us it's interested in Intel again, rather than shifting its attention to a more expensive, slower-growing semi plays like Advanced Micro Devices or Texas Instruments, we might want to trust the analyst's judgment.

Then again, we might not.

Valuation matters
Remember that Standpoint's recommendation isn't news-driven: "We are not expecting good news from INTC when they announce Q1 earnings. PC production has not been strong, but that is in part due to disruptions in supply." Apple's (Nasdaq: AAPL  ) iPad, coupled with forays into tablet PCs by Hewlett-Packard (NYSE: HPQ  ) , Research In Motion (Nasdaq: RIMM  ) , and others, are sapping demand for the traditional PCs on which Intel depends.

Instead, Standpoint's making straightforward play on the value of the stock. At less than 10 times last year's earnings, and "9X estimates for next year," Standpoint considers Intel simply too cheap not to own.

However, last quarter, Intel advised investors that it intends to ramp up capital spending this year, increasing capex from last year's $5.2 billion to as much as $9 billion. As a result, Intel's free cash flow -- which now mirrors GAAP net income at a level of roughly $11.5 billion -- will fall steeply over the coming quarters.

Foolish final thought
Intel could end the year with free cash flow barely exceeding $7 billion -- selling for as much as 16 times its trailing free cash flow, but only growing at 12% over the long term. I think that's too little free cash, and too little growth, to justify the company's current $109 billion market cap.

Granted, Intel's strong dividend payout is probably enough to make up the difference and prevent Standpoint's endorsement from actually losing money. But unless I miss my guess, investors at today's prices have little chance of booking a profit. For all its great past recommendations, this time Standpoint's giving you bad intel.

Intel is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor choice. The Fool has written puts on Apple. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a bull call spread position on Apple. Motley Fool Options has recommended a diagonal call position on Intel. The Fool owns shares of Apple, and Texas Instruments.

Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 551 out of more than 170,000 members. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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