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.
A sweet deal ...
No two ways about it: Nuance Communications
Clearly, this company has mastered the fine art of press release bingo. And all the shouting has attracted Wall Street's attention. This morning, Nuance notched an upgrade to "buy" from Longbow Research, and an 18% target-price-hike from FBR Capital (to $33 per share.) Both of these analysts are buying into the growth story at Nuance. Should you?
... that comes at a rich price
There's no doubt that Nuance's initiatives sound exciting. I can certainly understand why they're inspiring optimism on Wall Street. And yet, despite the upgrades, Nuance stock is looking pretty flat this morning -- actually down a few cents as I write these words. So what's the problem?
In a word: price. Nuance Communications may have all the prospects in the world, but at a stock price of more than 240 times earnings, and a growth rate that's pegged at just 15%, the stock looks to have all these prospects priced in -- and more. Indeed, if you read my last column on the stock, you'll recall that Nuance is actually running free cash flow negative – that is, "burning cash" -- once you factor the cost of its massive corporate acquisition spree into the calculations.
So what's an investor to do? How do you invest in this growth story, without paying the high price that Mr. Market demands?
Zig when Wall Street zags
I've got a theory. Three of them, actually, and I'll tender them for your perusal here.
First, if it's Nuance's ultrabook initiative that has you feeling optimistic about the stock, consider buying stock in its partner: Intel. At just 11 times earnings, and 11% long-term growth, Intel stock's a whole lot cheaper than its new partner. Plus, Intel pays a hefty 3.3% dividend -- which is 3.3% better than what Nuance is shelling out.
Second idea: Apple
Final Foolish thought
Last but not least, what if it's Nuance's entrée into TV remote-controlling that floats your boat? Here the opportunities are most plentiful. For a couple of years now, the TV market has been basically dead in the water. Shares of Best Buy and hhGregg have been shipwrecked as consumers simply refused to buy the argument that 3D television was "the next big thing." Ultra-thin, ultra-light OLED televisions, a favorite theme of investors in Universal Display
In contrast, adding a microphone and a bit of Nuance software to an existing hi-def chassis -- transforming it into a voice-activated TV -- sounds to me like the kind of low-cost improvement that could yield big sales gains to the TV retailers. In anticipation of this, you could buy shares of Best Buy or hhGregg … or you could snag an even better bargain with Corning
Whichever of these three trends you choose to jump on, though -- be it Intel, Apple, or Corning -- all of them look like better bargains that high-P/E, free cash flow negative Nuance.
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Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 328 out of more than 180,000 members. The Motley Fool has a disclosure policy.
The Motley Fool owns shares of Corning, Apple, Intel, and Best Buy. Motley Fool newsletter services have recommended buying shares of Nuance Communications, Apple, Corning, Intel, Universal Display, and hhGregg, as well as creating a bull call spread position in Apple and Intel and writing covered calls in Best Buy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.