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…
Sharply spiking prices for corn and wheat recently forced General Mills
Is now the time to jump back on the ag-products bandwagon? Snap up shares of fertilizer fanatics Mosaic
Not necessarily, according to Deutsche Securities.
While higher ag prices are certainly good news for these stocks, Deutsche thinks investors may have gotten a bit overexcited about some of them. It's particularly down on Monsanto
In short, Deutsche argues that most of the gains you could have made here are history. It's time to exit the stock, and wait to see whether Monsanto can "grow volume and/or gain share in US corn." Should you take this analyst's advice?
Let's go to the tape
It really depends. On the one hand, I have to say I'm impressed with Deutsche's record in the Chemicals sector (Monsanto's home turf). Over the four years we've been tracking this analyst, Deutsche has turned in near-58% accuracy on its picks, which include such big winners as:
Deutsche's Picks Beating S&P By:
On the other hand, Monsanto may be close to Deutsche's target price today -- but I doubt it got there by the route the banker was expecting. Since recommending that investors buy the shares following the 2009 commodities bust, Deutsche's recommendation to buy Monsanto has actually losing to the market by a god 48 percentage points.
Quit while you're behind
That said, I do agree with Deutsche's conclusion today. Just because the pick worked out worse than expected is no reason to hold onto the shares if they're unlikely to result in gains. Sometimes, you just want to cut your losses, declare "victory," and go home. That's the right call to make on Monsanto today.
Based on trailing earnings, Monsanto already looks pricey at a P/E of 29. That's more than twice the P/E at rival DuPont
That's even truer when you consider the stock from the perspective of the cash it produces, relative to the profits it reports. Under GAAP accounting principles, Monsanto "earned" $1.1 billion over the past 12 months. But would you care to guess how much of those earnings were backed up by cold, hard greenbacks? Less than 60%.
Monsanto generated only $643 million in free cash flow over the last year. That's barely half its reported net income, and could only lift the company's price-to-free cash flow ratio all the way up to a still-steep 49!
No one likes to walk away a loser -- not Deutsche Securities, nor the investors who followed its advice when they bought Monsanto last year. But Monsanto simply costs too much today, and it's bound to fall soon. My advice: Don't get plowed under by the rush to exit this stock. Follow Deutsche's lead, declare victory, and go home.
We've found a much better ag play than Monsanto.
Rich's pessimism notwithstanding, Motley Fool Options has recommended a synthetic long position on Monsanto. Which just goes to show you -- 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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