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.
And speaking of the best...
One of the best stock pickers you've probably never heard of waded into the software industry yesterday, offering investors its opinion on two stocks to buy for the long term, and one... not to. The analyst in question: Hilliard Lyons. (See? Toldja you've never heard of it.) And its recommendations:
- Buy EMC (NYSE: EMC).
- Buy Teradata (NYSE: TDC), too.
- But just hold Tibco Software (Nasdaq: TIBX) for the time being.
The question is, why?
Let's go to the tape
Problem is, we don't really know why Hilliard is favoring two of these stocks with its buy ratings while holding back on Tibco. While most major media outlets confirm that Hilliard issued the ratings yesterday, none give any details on why, exactly, Hilliard issued the ratings it did.
Fortunately, though, there are a few things that we do know that can help you decide whether to follow Hilliard's advice on these stocks. For example, we know that Hilliard Lyons is one of the most successful stock pickers that we track on CAPS, outperforming 97% of the investors in the universe, and ranking among Wall Street's Best analysts. We also know a few things about the companies it's just rated:
|
P/E |
Growth Rate |
Free Cash Flow as a % of Net Income | |
|---|---|---|---|
| EMC | 22 | 17% | 186% |
| Teradata | 25 | 15% | 146% |
| Tibco | 36 | 16% | 173% |
Sources: S&P Capital IQ, Yahoo! Finance.
As you can see, none of these firms looks particularly attractive on the surface. All sport high price-to-earnings ratios and growth rates that -- while speedy -- are not quite high enough to qualify any of the companies as obvious values from a PEG perspective.
On the other hand, if you take a look at the firms' cash flow statements, a pattern becomes clear: All three of these firms generate free cash flow far in excess of their reported "net income" under GAAP. To put it plainly, all three are more valuable than they appear.
Stealth software bargains
Savvy investors will of course realize that this is not uncommon among software stocks. Industry flag-bearer Microsoft, for example, boasts FCF 107% as robust as its reported income. Database designer Oracle (Nasdaq: ORCL) currently generates cash profits at 135% the rate at which it reports net income. In fact, if you ask me, Oracle is another stock that Hilliard might want to consider blessing with a buy rating. At less than 11 times free cash, a near-1% dividend, and a 12%-plus growth rate, the shares have finally become oversold, in my opinion.
Oracle's also a better bargain than at least two of the stocks Hilliard is focusing on this week. Of the three, Tibco is still the most expensive stock on the list, but at just over 19 times free cash flow, a whole lot cheaper than it looks on the surface. Teradata, at 16 times FCF, may not get my nod as a buy rating... but it, too, is closer to "cheap" than it looks.
And EMC? At just 10.7 times free cash flow, a 17% growth rate, and boasting a bank account replete with $1.3 billion in net cash, it's a bona fide bargain. EMC also owns a sizable stake in "virtual" storage specialist VMware (NYSE: VMW), itself a prodigious producer of cash, and offers investors a great way to own part of that franchise at a price far below the 57-times-earnings price tag that VMware's own shares fetch.
Foolish takeaway
I've said it before, and I'll say it again: If you're looking for a deep-value bargain in software, EMC is the best place to be today. Cash-rich, growth-speedy, and value-priced, this stock's one to own for the long run. That's why I've personally recommended the stock on my CAPS scorecard. And that's why I approve of Hilliard Lyons' recommendation of EMC today.
On the other hand, our Fool analysts like one of Hilliard's recommendations even more than they do EMC. Which of these stocks gets top marks from our award-winning analytical team? Read "The Only Stock You Need To Profit From the New Technology Revolution" and find out. This special report is totally free of charge -- but it's available for a limited time only.
