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.
2 outta 3 ain't bad
What do you do when one of the best stock pickers in the business suddenly offers you some free advice on not one, not two, but three of the hottest tech stocks in the world? Personally, I listen up. And from what I hear, independent stock shop Longbow Research thinks now is a great time to buy Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD). But NVIDIA (Nasdaq: NVDA) ... not so much.
So far, no one seems to know much about the details of the new ratings. My best guess is that they're tied to Apple's (Nasdaq: AAPL) new MacBook Pro release, which incorporates chips from both of the upgraded stocks, but none from NVIDIA. Though I can't tell you much yet about why Longbow made these recommendations, I can tell you how well Longbow does when picking these kinds of stocks -- thanks to Motley Fool CAPS.
Let's go to the tape
According to our records, you see, Longbow is one of the literal best stock pickers on the Street, outperforming more than 97% of the investors we track. This analyst boasts a record of 58% accuracy across the 244 separate recommendations it's made over the past five years. It's nearly always right when recommending railroads (82% accuracy). It's great at picking building-products makers (75% accuracy). It's got mad skills in smokestack industries like machinery (64%) and chemicals (61%) as well.
And yet, good as Longbow has shown itself to be in so many industries, I simply cannot endorse its ratings this week. (At least not all of them.) Why? It's simple, really. AMD, Intel, and NVIDIA don't operate railroads. They don't manufacture drywall, build trucks, or decant chemicals, either. Instead, they make semiconductors. And as it just so happens, picking semiconductor stocks is one of the few things Longbow doesn't do well:
|
Company |
Longbow Rating |
CAPS Rating |
Longbow's Picks Lagging |
|---|---|---|---|
| Cirrus Logic (Nasdaq: CRUS) | Outperform | **** | 27 points |
| LSI Corp. (NYSE: LSI) | Outperform | ***** | 27 points |
| MIPS Technologies (Nasdaq: MIPS) | Outperform | *** | 54 points |
As a matter of fact, the last time this analyst recommended buying Intel and NVIDIA, it got the call wrong, losing 9 percentage points to the market on Intel and 27 points on NVIDIA. And call me a pessimist, but I think Longbow's getting it wrong again.
Mostly wrong
Why do I say this? Two reasons. First and foremost, if I'm right that it's Apple's MacBook that inspired Longbow to place its bets, then I think the analyst may be overstating the new computer's influence. After all, the most recent PC market share reports show Apple's Mac line controlling all of a 4.4% share of computer sales in Q4 2010. While that's not an insignificant number, I'd argue it's statistically insignificant as a justification for endorsing any given semiconductor stock.
As for the second reason, it's -- you guessed it! -- valuation. While I'm on board with Longbow's endorsement of Intel at 11 times earnings and with a near-12% long-term growth rate, I'm considerably less sanguine about its AMD pick. Unlike Intel, AMD's valuation doesn't look at all attractive to me. The stock sells for a higher P/E than Intel (14.7), but possesses a slower growth rate. Most important of all, while Intel boasts free cash flow in excess of what it reports as "net income," AMD is exactly the opposite, reporting $471 million in net profit last year, but burning $560 million worth of cash. To me, that looks like a great reason to cash out the 68% profits investors have made on the stock since late August, and sell the stock. What it does not look like is a reason to buy more AMD stock today.
As far as NVIDIA goes, the argument is similar, but opposite in direction. NVIDIA shares have appreciated 150% in price since their lows of last August. Today, they sell for more than 54 times earnings, but this number greatly understates the company's free cash flow, which at $578 million gives the stock a mere 23.5 times free cash flow valuation. That's not cheap enough that I'd go out and buy the shares, mind you. But when you consider that NVIDIA is expected to post strong upper-teens growth over the next five years, it's pretty darn close.
Foolish takeaway
The fact that Longbow prefers AMD over NVIDIA at these prices simply boggles the mind. While technically, I agree that NVIDIA is probably a "hold" at today's prices (the rating Longbow assigned it), I disagree with the sentiment that has Longbow assigning that rating. In the final analysis, about the only thing Longbow really got right with these picks, was when it acknowledged the value "inside" Intel.
