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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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.
Is China a fraud?
It's the biggest market on Earth. The most populous place on the planet. But is China also just one big fraud? A lot of investors think so. And it doesn't help when we read stories that companies such as Longtop Financial
But even if some Chinese companies are dishonest, it seems a stretch to take that data point and proceed to the assumption that the whole dang country is a fraud. After all, the Chinese didn't invent Enron.
Recognizing this truism, Susquehanna International yesterday went on record in favor of at least half-a-dozen Chinese stocks that it's pretty sure are legit. First, the Pennsylvanian stockpicker reiterated bullish views on Baidu
Focus on the numbers
According to Susquehanna, investors' skepticism about the prevalence of accounting fraud in China has become "overdone." And also according to Susquehanna, if what these companies are telling us is,true, then there's a lot of value to be had in keeping faith in these stocks.
But I disagree. Seems to me that even if we assume that everything China is telling us is completely above-board, I'm not enthusiastic about any of the stocks Susquehanna chose to recommend yesterday -- except for one. I mean, take a look at these numbers:
5-year Projected Growth Rate
None of this exactly screams "bargain!" at me. What's more, these companies aren't particularly diligent about reporting their cash flow, so it's hard to gauge the quality of the earnings being reported. If the numbers on the surface aren't attractive, I shudder to think what we might learn when the companies get around to revealing their actual free cash flow.
Fact is, out of the six stocks Susquehanna endorsed yesterday, only two look moderately attractive on the surface: Focus Media, with its 19 P/E ratio and 20% projected growth rate; and NetEase, at 14 times earnings and 17% growth. These are also the only two companies on the list providing up-to-date cash-flow information. Sadly, that's bad news for one of them -- Focus Media, which appears to be generating about 17% less free cash flow than its GAAP net income would suggest. But it's good news for NetEase.
NetEase … not bad
Of the six stocks Susquehanna recommends, only NetEase looks attractive to me, based on its very reasonable PEG ratio of 0.8. When you consider further that the company generates more free cash flow than it reports as net income, and boasts a balance sheet brimming with cash, the enterprise value-to-free cash flow ratio that results is a very attractive 9.5 -- not bad for a 17% grower.
That said, I'm afraid NetEase is the exception that proves the rule today. You don't need to question Susquehanna's skill at picking winning stocks to disagree with its picks. (Although when you learn that Susquehanna gets more than half of its stock recommendations wrong, you might want to question it.) You don't even need to assume the companies are frauds to avoid them. Even assuming their numbers are 100% accurate and honest, they still don't look attractive.
That makes picking one winner out of this field of six as easy as pie: NetEase.
Will NetEase perform as promised and outperform the market? Don't guess. Add it to your Fool Watchlist and find out.