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." Here, we'll show you whether those bigwigs actually know what they're talking about. We've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Speaking of which...
National Oilwell Varco
(NYSE: NOV) reported first-quarter results yesterday, and its news wasn't great. As Barron's pointed out, revenue growth and earnings merely matched consensus estimates, in contrast to rival Baker Hughes' (NYSE: BHI) "earnings beat." Though its stock fell 5% in response, National Oilwell's performance still managed to impress the oil analysts at Citigroup.

Break from the herd, this megabanker upgraded National Oilwell's stock to "buy," and elevated its price target from $78 to $92. That's a surprising response to a company's admission that profits fell 5% year over year. Heck, even if it hadn't been forced to take charges for writing down Libyan assets and overpaying for acquisitions, National Oilwell would have only managed to "meet" consensus targets of $1 a share. In the midst of this mess, does Citi see something the rest of us missed?

Let's go to the tape
Whatever you think about its stock, our CAPS stats indicate that Citigroup's stockpicking team is simply first-rate. Citi analysts outperform more than 90% of the investors we track, and boast a 53% record for accuracy on stocks, both overall and in the Oil & Gas sector. Over the years we've been following it, Citi has successfully advised investors on winning oil plays such as Marathon (NYSE: MRO) and Chevron (NYSE: CVX), beating the S&P's performance by 40 percentage points and 33 points, respectively.

On the other hand, Citi has enjoyed significantly less success in Energy Equipment and Services subsector, where 54% of its bets go awry:


Citi Rating

CAPS Rating
(out of 5)

Citi's Picks Lagging
S&P by

Weatherford (NYSE: WFT) Outperform ***** 20 points
Halliburton (NYSE: HAL) Outperform *** 13 points
Schlumberger (NYSE: SLB) Outperform ***** 9 points (picked twice)

Alas, guess which industry National Oilwell occupies?

Drilling for details
While Citi's record isn't quite up to snuff on oil services stocks, perhaps this time, the banker will finally get one right? Don't count on it.

First, we don't know why Citi likes National Oilwell to begin with. Few major media outlets have yet even reported the upgrade's existence. Even, which usually gets the scoop on these kinds of upgrades, states only that the upgrade was made, and seems to know no more details about why it was made than anyone else

According to the company's publicly available SEC filings, National Oilwell Varco stock looks like anything but a bargain:

  • It pays a dividend of just 0.5% per year, small enough to make the meager payouts at Schlumberger, Baker Hughes, and Halliburton look generous by comparison.
  • It sells for more than 19 times trailing earnings, but is only expected to grow those earnings at about 12% per year over the next five years.
  • Perhaps worst of all, it probably isn't even as profitable as its P/E suggests. Last year, actual free cash flow at the company represented less than 79% of its reported GAAP earnings.

Foolish takeaway
No disrespect to Citigroup, but with only these numbers to go on, I'm less than enthused. Citi will have to do a much better job of laying out an investment case for National Oilwell if it wants to win me over. And to be brutally honest, even then, I probably won't buy. Before I invest one penny in National Oilwell, the company must also do a better job of showing us the money.