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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, 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.
"Bad news is good news"
Bad news can be good news -- depending on how you look at it, and who's doing the looking. If you were an STEC
So ... a bad day to be a STEC shareholder. But according to the analysts at Lazard Capital, it's now a great day to be a STEC share buyer. Crunching the numbers, Lazard announced it was initiating coverage of STEC post-earnings, and projected that the shares that fetch just $10 and change today will hit $12 within 12 months' time. But is Lazard right about that?
Let's go to the tape
I have to say that at first glance, the case for buying STEC looks compelling. While near-term guidance disappointed, STEC pulled down some pretty nice numbers last quarter, and better revenues and GAAP profits were just the start of the story. STEC also reported $31.1 million in positive free cash flow generated year-to-date -- three times what it had collected by this point in time last year.
The stock now trades for less than 10 times trailing profits, which is cheaper than memory and storage peers OCZ Technology
However, even at these beaten-down multiples, STEC still isn't quite the cheapest of the bunch. STEC shares carry a higher P/E than HDD specialist Western Digital
STEC's also beginning to look like it may have peaked profits-wise, and most analysts on Wall Street warn that the company's only likely to achieve 6% annual long-term profits growth from here on out. Worryingly, 6% is just about the slowest rate you'll find reported in the industry, where several of the company's rivals -- Seagate, SanDisk, and OCZ -- are expected to keep growing in the double digits, while STEC staggers along in the singles.
Speaking of staggering laggards, I also can't say as I place much faith in Lazard's endorsement of the stock. Based on data we were able to collect on the analyst in the years when it was still publicly reporting its ratings through Briefing.com (Lazard has since "gone dark" on the majority of its recommendations in our CAPS system), Lazard has historically underperformed badly in the semiconductor space. Of the 13 recommendations it made in the period from 2007 to 2009, only 25% -- one in four -- actually managed to outperform the market.
As STEC is fresh off an earnings warning, with a questionable valuation sub-par free cash flow, and a weak growth rate, I'd be more inclined to sell STEC today than buy it. And the fact that Lazard Capital is the one pushing this stock on its clients? That just screams at me: Stay away!
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