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...
Commodities investors got a shot in the arm (the good kind) yesterday, as Canadian investment banker Canaccord Adams gave its blessing to Freeport-McMoRan Copper & Gold (NYSE:FCX). News of the upgrade, plus a generally ebullient mood on Wall Street yesterday, combined to send the shares up nearly 10%. But which played the greater part, I wonder: Investor hopes, or the actual thoughts that Canaccord gave voice to?

According to the analyst, Freeport will benefit from stability coming to the market for copper and molybdenum in 2009. Specifically, Canaccord predicts that: "A copper and molybdenum price combination of US$1.25/lb and US$7/lb would be a concern for 2009, but only just." What's more, although the analyst has reservations about the company's liquidity, Canaccord feels somewhat reassured by Freeport's "potential to forestall problems with preemptive issue of stock, as already disclosed."

I agree.

Let's go to the tape
Now at first glance you might find that surprising. Take a look at Canaccord's record on CAPS, and you can't help but worry if this analyst really knows what it's talking about when it's talking about mining stocks -- or most anything else for that matter. You see, there's no arguing that Canaccord has picked winners in its day ...

... but it's made blunders, too:

And overall, the analyst's record of guessing wrong on 53% of its stock picks, underperforming the S&P 500 by an average of nearly two percentage points-per-pick -- and underperforming more than 80% of investors tracked by CAPS -- well, none of that inspires a lot of confidence. However, Canaccord has done well with its picks (and shovels) in the Metals and Mining sector as a whole, digging out almost 400 total points on 15 separate selections.

And yet...
The simple fact of the matter is that Canaccord makes a lot of sense with its Freeport upgrade. For one thing, the analyst isn't actually saying you should go out and buy the stock. All Canaccord said yesterday, really, was that you didn't need to sell Freeport. To me, that fact seems self-evident.

Consider that despite being hit much harder than industry peers Newmont Mining (NYSE:NEM) or Southern Copper (NYSE:PCU), Freeport's financials actually looks comparable to either of these two worthies. Debt-to-equity-wise, Freeport's 0.36 long-term ratio sits smack dab in the middle between Newmont's 0.43 and Southern Copper's 0.33.

As far as liquidity concerns go -- well, I admit that I don't like the look of Freeport's debt load. For a $10.8 billion stock, $7.3 billion in long-term debt does seem a bit much. And yet, according to the firm's income statement, Freeport has had no real issues with covering the interest costs on this debt. With $5.3 billion in trailing annual operating profit at last report, Freeport can cover the cost of its debt 9 times over. Now, maybe I'm missing something here (and if I am, feel free to drop by CAPS and point it out), but I honestly don't see what all the fuss is about.

That said, and in the spirit of Fool disclosure, I should point out that there's a reason I don't invest in commodity plays myself: The price volatility scares the bejeezus out of me. Super-profitable today, Freeport is expected by analysts to earn a mere penny per share in 2009. In the event that Freeport can't cover its interest costs, it might resort to issuing new shares, as Canaccord suggested. With such a move, current shareholders will be diluted, but there doesn't appear to be any serious sign that Freeport won't be a going concern in the future.

Foolish takeaway
What I know -- and have seen -- of cyclical industries like mining tells me there's little reason to expect the current bust will not return to boom times, as it always has in the past. When it does, long-term investors who held onto their Freeport shares can enjoy the profit.