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 worst...
Shareholders of semiconductor maker NVIDIA
Thailand's flooding last year, you see, caused hard-drive supply shortages at Western Digital
Soon after this news was out, analyst JMP Securities downgraded NVIDIA shares to underperform (aka sell), citing among other things NVIDIA's "lackluster" record for getting its new Tegra 3 chip into smartphones. Should investors be worried?
Let's go to the tape
Perhaps. You see, in many respects, it's unfair to label JMP Securities a "worst" analyst. For one thing, this banker often gives good advice on the stocks it recommends, getting about 48% of its recommendations right (nearly as accurate as a coin flip). For another thing, when JMP does guess right, it often picks really big winners. The average JMP recommendation, counting both winners and losers, still outperforms the S&P 500 by about 14 percentage points. So as I say, JMP is a pretty good analyst on many things.
Semiconductors is not one of these things.
A record to run from
Over the six years we've been tracking its performance in semiconductors, JMP has racked up a perfectly miserable record of just 33% accuracy on its chip stock recommendations. Quite literally, this analyst has proven itself twice as likely to be wrong on its semi picks as it is to be right. Even more important is JMP's record on NVIDIA itself. Three times in the last four years, JMP has issued affirmative buy-sell advice on NVIDIA. JMP's been wrong each time, with picks that have underperformed the market by 28 percentage points, combined.
And yet, the analyst is sticking to its guns on NVIDIA. Two months ago, as you may recall, JMP downgraded the stock to market perform, citing worries that NVIDIA was losing too many smartphone slots to competing chips from Qualcomm
JMP's opinion on this score hasn't changed; it's strengthened. So before earnings come out next month, JMP wants to make sure it's on record predicting a disappointment.
Curb your enthusiasm
But here's the thing: We already know NVIDIA is going to disappoint us (to some extent). That's why the stock is so cheap! At 14 times earnings and just 11 times trailing free cash flow, it seems clear that few investors are expecting a blowout quarter from NVIDIA in February. Maybe not even in May. But if NVIDIA delivers anything like the growth that Wall Street expects for it further out, the stock is still crazy-cheap at today's prices.
Consider: Fourteen times earnings is just about the perfect price you'd expect for the 14% growth the Street has NVIDIA pegged for. Back out the company's $2.7 billion cash hoard, and the ex-cash P/E falls below 10 times earnings. Value the stock on free cash flow, and it's cheaper still -- with an enterprise-value-to-free-cash-flow ratio of just 7.8.
In short, if NVIDIA delivers just half the expected long-term growth analysts expect from it, it's fairly priced today. If it does anything better than that, it's a bargain. That's why I've personally -- and publicly -- recommended the stock in my CAPS portfolio (which you can see here, along with 55 other recommendations I've made, and my record on each). That's why I'm convinced JMP is wrong to sell NVIDIA today.
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Fool contributor Rich Smith owns shares of NVIDIA. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked in the top half -percent out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy.
The Motley Fool owns shares of Texas Instruments, Qualcomm, and Western Digital. Motley Fool newsletter services have recommended buying shares of and writing puts on NVIDIA.
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