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 ...
Everybody loves a hot IPO, but what about a cold one? When clothing retailer Express (Nasdaq: EXPR), finally free of former parent Limited (NYSE: LTD), returned to the Nasdaq last month, the stock promptly plunged. Debuting at $17 a share, the stock bottomed out near $13 a stub a few weeks back. But ever since, it has been flying, and this week especially.
Why? Well, there's the upgrades for one thing. Yesterday, a bevy of Wall Street's best and brightest weighed in on the stock's prospects, with:
- Bank of America's Merrill Lynch unit predicting Express will produce "positive comps" and "better than expected margin expansion" over the next few quarters.
- UBS praising the company's "highly tenured management team that is poised to see [meaningful] sales and margin gains"
- Piper Jaffray expecting the company to profit from "increased spending among young adults," with Express becoming "an increasingly preferred shopping destination"
- And Goldman Sachs adding that "current valuation levels imply a multiple for EXPR toward the lower end of our coverage universe."
Damned with bright praise?
Investors reacted with predictable glee to the news of multiple upgrades, bidding up Express shares nearly 4% yesterday in response. But were they right to do so? Does all this Wall Street happy talk actually hold water?
I admit that, ordinarily, I would be skeptical of these analyst comments. When one analyst speaks positively about a stock, there's sometimes good reason for it. When many analysts speak all at once, however, and when they all say essentially the same thing -- well, let's just say it sets the bells on my Fool cap to jingling in alarm.
Again, for good reason. It's not just coincidence that all of these analysts suddenly discovered Express. To the contrary, they've known about the company for some weeks; they've just been unable to talk about it because of SEC quiet period requirements. These aren't just any ol' analysts, you see. They're the same four bankers who helped underwrite the Express IPO. And that means they've got a vested financial interest in seeing the stock do well, so that they can cash out at something approaching a profit.
How much of a profit, you ask? Well, let's take a look at the IPO prospectus and find out. According to the prospectus, both Piper Jaffray and UBS each had 800,000 Express shares allotted to them at the IPO, paying roughly $15.90 per share for their stakes. Similarly, Merrill and Goldman each took equal stakes of 6 million shares. In total, therefore, these four bankers have sunk about $216 million into Express, and are gambling that they can sell the shares for more than they paid. That's plenty of incentive to make sure the IPO "works out." Plenty of incentive to say nice things about Express.
Be cynical, but not stupid
So yes, color me cynical about the upgrades this week, but not blindly so. Fact is, while the bankers have every incentive to "boost" the shares they hold, I actually believe that in this particular instance, they also have the facts on their side.
Consider: Only a few weeks ago, as the rest of the retail clothing world was donning sackcloth and ashes in response to the anemic sales reports at American Eagle (NYSE: AEO) and Abercrombie & Fitch (NYSE: ANF), what did we see but li'l ol' Express coming out with its first post-IPO earnings report, and Express announcing that it had grown its Q1 sales 14%, while posting a 12% increase in comps. It announced that not only would it improve profit margins, as Merrill and UBS predicted yesterday, but that it had already done so -- tacking on 700 basis points worth of gross margin improvement to the sales gains, and producing quarterly profits nearly four times as much as it had earned one year ago.
Foolish takeaway
So to recap: Did the bankers who told you to buy Express yesterday have a vested financial interest in getting you to follow their advice? Do they want you to buy Express primarily so that they can line their own pockets? Yes.
But is their advice "good" nonetheless -- is Express a stock worth owning?
Absolutely. With management promising to keep the comps gains coming over the rest of this year, and to produce profits of roughly $1.30 per share (a 30% year-over-year improvement, by the way), I have to say that these shares look mighty tasty at today's price.
