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.
So 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.
Today, we're going to take a look at three high-profile tech moves on Wall Street: An upgrade for Linear Technology
Linear points up
First up is semiconductor shop Linear Technologies, which received not one but two (count 'em, two!) upgrades this morning, to "buy," courtesy of Longbow Research and Nomura Securities.
Linear's not expected to post earnings till tomorrow, but these analysts aren't waiting for good news to justify their upgrades -- and why would they? At 15 times earnings, the stock's anything but expensive, and that's before you notice that Linear almost always generates more cash than it reports as GAAP "net income." With $549 million in trailing free cash flow, versus reported income of just $496 million, this stock's at least 10% less expensive than meets the eye. Plus, Linear pays its shareholders a tidy 3.1% dividend yield yet uses less than half its annual income to fund the dividend. Whatever news tomorrow brings on the earnings front, that dividend should be safe, giving investors a chance to buy today and rest easy tomorrow.
Optimism all around
You might not guess it from how the rest of the Nasdaq is performing this morning, but optimism was the major note of the day in tech. In addition to the two upgrades on Linear, two other tech names got increases in target price, as first FBR Capital upped Juniper Networks to $24 (about a 14% boost) and then Mizuho gave a similar bump to F5 Networks (from $137 to $151 -- a 10% raise).
So ... good news, right? Well, maybe not. After all, just because these analysts like the stocks a little better today than they did yesterday, that doesn't mean you need to follow suit -- and in fact, I'd suggest you shouldn't. Take F5, for example. At 23 times free cash flow, and a whopping 39 times earnings, the stock looks aggressively priced for the 20%-ish long-term growth that most analysts expect it will produce. Mizuho calls this one a "buy," but to my Foolish eye, a "hold" rating seems more appropriate.
Similarly with Juniper. Here we have a leading maker of telecom equipment expected to grow profits at about 13% a year over the next five years -- respectable, but not exactly wildfire growth. Meanwhile, Juniper shares fetch a healthy 15 times free cash flow and 26 times earnings. To me, these numbers suggest that the stock's fairly valued at best, and perhaps even a bit overheated. What's more, I'm not even sure FBR Capital would argue with me about this. With Juniper already past its old $21 price target, the analyst really had only two choices today: Increase the target, or recommend selling the stock.
FBR chose the former, but a more cautious investor should consider the latter.
"No truth in Pravda, no information in Izvestiya" ... and little info at Infosys, either
Last -- and with apologies for ending on a down note -- we come to famed Indian outsourcer Infosys. According to Briefing.com, this stock was the sole recipient of an actual downgrade this morning, as HSBC Securities pulled its "overweight" rating and dropped Infosys to "neutral." Barron's says the situations actually worse than that, reporting no fewer than three downgrades ... in addition to the one from HSBC!
As Barron's explains, Infosys has no one but itself to blame for the wave of negativism, as it was all inspired by last week's weaker-than -expected Q4 earnings news, and the IT outsourcer's weak outlook for the current year as well. The note from Australian banker Macquarie is particularly instructive, warning that Infosys could have difficulty hitting even its weak revenue target this year, suggesting that rival Accenture
I agree. Sure, at just over 16 times earnings, and a projected 16% long-term growth rate, Infosys doesn't look expensive. But if Macquarie's right, the company may fall short on the revenue growth, which would indeed make the stock look expensive -- the more so when you consider that historically, Infosys has rarely ever produced actual free cash flow on par with its claimed GAAP earnings -- and in this most recent report, it declined to give any information whatsoever on its free cash flow position.
Given all this, I think Macquarie -- and the other three analysts joining it in downgrading the stock this morning -- are right to be skeptical. Infosys is no "buy." It might even deserve a "sell."
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Whose advice should you take -- Rich's, or that of "professional" analysts like Nomura, FBR, and Macquarie? Check out Rich's track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.
