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.)
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.
May you live in interesting times
I have to hand it to Robert W. Baird -- these guys really do know how to make earnings season "interesting." Alcoa officially kicked off the start of earnings season for fiscal Q2 2011 yesterday. But before anyone else can get a word in edgewise, Baird is barging ahead of the line and announcing its opinions on a whole series of stocks before they even get a chance to tell us how they did:
-- a "buy," with a price target of $260 a stub. (Nasdaq: AMZN)
-- another outperformer, worth $40. (Nasdaq: EBAY)
-- likewise, worth $30 if it's worth a nickel. (Nasdaq: LQDT)
-- buy it before it soars to $75. (Nasdaq: SFLY)
- And last but not least, Digital River
-- the only wet blanket of the bunch. Baird rates it "neutral." (Nasdaq: DRIV)
Let's go to the tape
"So what?" you ask. "Why should we care what Baird thinks about any of these companies?" And that's an excellent question -- because Baird isn't telling us all that much today.
While the big financial-media sites mostly confirm that these new ratings came out today, none contains any further details on Baird's reasons for assigning the ratings it does. But thanks to the magic of CAPS, while I can't tell you much more about what Baird thinks about these companies, I can at least tell you how well it does its thinking -- and that's great news for the companies Baird likes:
R.W. Baird Rating
R.W. Baird's Picks Beating (Lagging) S&P by
Baird may not always pick the most popular companies, but it does seem to have a knack for picking the ones that will outperform the market. Indeed, according to our CAPS stats, on average Baird picks two winners for every one loser it recommends in the Internet Software and Services industry. Seems to me the odds are good that Baird will be proven right about at least one of its new picks.
E-Commerce stocks: Buy the numbers
But which one? According to Baird, every one of these four stocks -- except D-Riv, of course -- is going to outperform the market over the next 12 months. If you ask me, though, while Baird might eke out a few wins here, there's only one surefire outperformer on this list.
Let's dispose of the also-ran first. Digital River is the only stock that Baird refuses to endorse today -- and it's right to do so. Selling for 79 times earnings, D-Riv looks overpriced from the get-go. It's true that the stock is expected to grow briskly in coming years, but the 19% compounded growth Wall Street is projecting just doesn't justify the stock price here.
But what about Amazon? It's a market darling and a favorite of consumers. But as I pointed out last year, Amazon also faces serious problems, as states across the nation ally with peevish big-box stores, including Wal-Mart
So eBay, then? Investors are being asked to pay an awful lot -- 23 times earnings -- for 10% annual growth.
Shutterfly's picture isn't much prettier. On the surface, it looks even more expensive than eBay, selling for a triple-digit P/E. Free cash flow at this stock is strong, however -- indeed, it's stronger than reported earnings at all of these companies. With a price-to-free cash flow ratio of 55, and ballparked at 35% long-term growth, Shutterfly is the kind of stock whose overvaluation could change in a hurry. I'd keep an eye on it, but I wouldn't buy just yet.
And then there was one
No, Fools, out of all the five ratings Baird initiated today, only one stock meets my standards for a true investing bargain: online surplus auction house Liquidity Services.
The stock sells for 59 times earnings, which is high enough to scare away a lot of value investors, keeping the price cheap for the rest of us. Digging deeper, we find Liquidity Services generating free cash flow far in excess of its reported net income. Far enough, in fact, to drop the P/FCF on this one down to 25 -- a bona fide bargain if Liquidity achieves the 30% growth target Wall Street has set for it. Liquidity also carries $96 million in cash on its balance sheet, alongside no debt whatsoever, making it an even better bargain.
In the end, Baird pitched us five stocks today, but Liquidity Services is the only one I might actually buy.
Fool contributor Rich Smith does not own shares of (or short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 555 out of more than 170,000 members.
The Motley Fool owns shares of Wal-Mart and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com, Liquidity Services, Digital River, eBay, Best Buy, and Wal-Mart and creating a diagonal call position in Wal-Mart Stores.
We Fools don't 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.