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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the worst ...
In my mind's eye, I see analysts from all the best Wall Street firms chuckling as they walk into the local Starbucks this morning. There they meet the Oppenheimer analyst who yesterday upgraded VeraSun Energy (NYSE:VSE) to "outperform." Asking his colleagues "what's so funny," the reply comes back so snappy you know they were just waiting to be asked: "So how does it feel to be a contrarian indicator?" (Want to talk contrarian, just this morning the firm went against the grain and upgraded NVIDIA (NASDAQ:NVDA) while four other analysts downgraded it. The results: Oppenheimer got smoked; NVIDIA is down more than 30% already today. Ouch!)

You see, Oppenheimer bucked the tide of negativity on ethanol yesterday, betting its reputation on the belief that "enough is enough" -- VeraSun is "oversold." In essence, Oppenheimer argues that its colleagues on the Street are a bunch of worrywarts: "While the Iowa floods drove corn prices to unprecedented heights, equally important, in our opinion, spot ethanol prices rose ... Ethanol producers can still be profitable at higher corn prices, if the price for the end product also rises."

D'oh!
In response, VeraSun stock declined a skosh yesterday ... then fell off a cliff this morning -- down 9% as of this writing. But really, can you blame investors for zigging when Oppenheimer said to zag? After all, the banker does rank in the bottom 20% of CAPS investors. Oppenheimer guesses right on its stock picks 47% of the time, which means that it has picked several really good winners ...

... it's picked even more losers:

I very much fear that yesterday's endorsement of VeraSun will add to Oppenheimer's litany of losers.

Why?
Corn-based ethanol's problems are legion, and we've written about them more times than I care to contemplate. You've got your:

• Dependence on government subsidies and tariffs against Brazilian imports.
• Continuing threat from more profitable Brazilian sugar-derived ethanol.
• Excessive use of dwindling fresh water supplies.
• Margins being subject to the whims of the corn commodity price index.
• And most important of all, the fact that corn-based ethanol uses nearly as much energy as, and some say more energy than, it "creates" as usable fuel.

Foolish takeaway
While ethanol boosters may quibble with one or all of the above assertions (or more likely, pay their lobbyists in Congress to do so), one fact remains undeniable: VeraSun is generating less and less operating cash flow, while its capital expenditures just keep growing. Result: massively negative free cash flow.

Even if none of the best-known arguments against ethanol persuade you to avoid VeraSun, this last one should seal the deal. Oppenheimer's going to get nuked on this one as it did earlier today. Keep yourself as far outside the blast radius as possible.