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...
I don't ordinarily discuss "greenhorn" analysts in this column. Fact is, well-known industry stalwarts like JPMorgan and Citigroup provide plenty of article fodder, what with their constant churning out of new ratings, turn-on-a-dime disavowal of old ratings, and what-not. And yet yesterday's initiation of coverage on Applied Materials (NASDAQ:AMAT) by relative unknown Auriga USA captured my interest, so chalk one up for audacity.
Following on the heels of a dismal earnings report at rival Lam Research Wednesday, Auriga initiated coverage of Applied Materials with one of Wall Street's rare "sell" ratings -- and a forecast that calls into question whether the rest of the Street has any clue whatsoever as to what they're supposed to be doing. Auriga argues that the semiconductor industry is currently in a "secular – not cyclical – correction."
Translation: things are not just getting worse before they get better, but simply getting worse, period. Whereas the rest of Wall Street expects to see A-Mat post some $5.7 billion in sales this fiscal year, and a $0.19 per share profit, Auriga predicts results much worse -- $4.4 billion in sales, and a $0.16 loss. (Likewise in fiscal 2010. Auriga's predicting profits just a quarter the size of Wall Street's consensus, and sales 20%-odd below what everyone else expects.)
Let's go to the tape
Actually, let's not. Usually, at this point in the column, I give you a glance at what we know about an analyst from our CAPS data-mining software -- its record for accuracy, best and worst picks, and so on. Problem is, Auriga's so new to CAPS that I'm not sure the data would be of much help to you. Suffice it to say that the analyst has so far been spot-on with most of its semiconductor predictions, correctly calling the recent trajectory at each of Micron (NYSE:MU) and Advanced Micro Devices (NYSE:AMD), and breaking even on Intel (NASDAQ:INTC). On these three picks Auriga outperformed the market by about 14 points total.
None of which bodes well for A-Mat investors. And it gets worse. You see, the fact is that for all its pessimism about the chip industry, Auriga actually likes A-Mat, praising the firm for its "strong product lineup and ... solid balance sheet," and pointing out that "solar is a wild card that could drive upside."
But here's the thing
Problem is, if solar is the only trick Auriga sees up A-Mat's sleeve... well, don't get your hopes up, because it just might be that this particular emperor is strolling around in the buff.
Another virtually unknown analyst whom I've been watching these past few months, Hapoalim Securities, has proven uncannily prescient in predicting the trend in solar. It has made bearish bets on everything from MEMC Electronic (NYSE:WFR) to First Solar (NASDAQ:FSLR) to Fool fave Suntech Power (NYSE:STP). Without going into a lot of detail, I'll just say that Hapoalim thinks expectations of an Obama-driven "solar boom" are optimistic at best, pipe dreams at worst. Which, if correct, would remove the only real hope that Auriga posited for A-Mat avoiding the industrywide meltdown that the analyst predicts.
Foolish takeaway
Considering its short history on CAPS (less than two months), if you feel a little skeptical of Auriga's "sell" rating, I wouldn't blame you a bit. Fact is, I, too, want to see the analyst get a little toweled-off around the ears before I begin describing it as a "good" analyst, much less one of the "best."
Even so, Applied Materials is selling for a 14 P/E based on trailing results -- so the stock already looks a mite pricey. You don't have to swallow Auriga's doomsday scenario whole to find reason to avoid the stock today. If the analyst is even "a little bit right" in saying that A-Mat's results will fall short of consensus numbers, that would suffice to destroy any margin of safety in the stock.
So just a couple of words to the Foolish today: Caveat investor.
