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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
"When you're right, you're right," goes the old truism. Unfortunately, I was clearly wrong when I advised ignoring Standpoint Research's advice in January and going ahead with plans to buy Microsoft
At the time, it felt like good advice. Investors were only charging 12 times earnings for shares of Mr. Softy -- half the going rate for faster-growing and sexier "tech-ternatives" Apple
Don't mess with success
And yet, go wrong I did. Over the five months since I sounded the all-clear on Microsoft, the shares have shed 13% of their value, and underperformed the broader S&P 500 by more than 20 percentage points.
Why have the shares underperformed? Maybe investors didn't like the $8.5 billion price tag on Skype -- roughly three times what eBay
Whatever the reasons, Standpoint clearly knew what it was talking about when it predicted that a "low-beta name" like Microsoft was unlikely to perform well "in a rising market" such as the one we've experienced for much of this year. So kudos to Standpoint, which has once again proven itself one of the most accurate stockpickers on CAPS, and boosted its accuracy rating to 64%.
Don't retreat -- reload
And yet ... even Standpoint never said Microsoft was too expensive per se. Rather, the analyst argued that if you want to win the kind of 20% gains (and avoid the 13% losses) that Standpoint's been regularly notching on Microsoft, it's essential to get the shares at the right price. Paying "a fair price" for Microsoft isn't good enough; you want a big margin of safety.
Fortunately, Standpoint now believes that margin of safety has returned to us, and offered a chance to revisit the profits of yesteryear. Microsoft shares sell for less than 10 times earnings today, and 8.4 times free cash flow. Cross out the company's $35.5 billion net-cash hoard, and the actual business itself is selling for a mere seven times free cash.
And what can I say? If I liked Microsoft at 12 times earnings and 10 times free cash flow five months ago, I obviously like it even more at today's prices. Once again, Standpoint is right about Microsoft. I only hope that in five months' time, I'll be able to say the same myself.
Fool contributor Rich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 516 out of more than 170,000 members. The Motley Fool owns shares of Oracle, Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Salesforce.com, Apple, eBay, Microsoft, and Google, creating a diagonal call position in Microsoft, creating a bull call spread position in Apple, and shorting Salesforce.com. We 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.