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 looking at a series of ratings moves on Wall Street: a big upgrade for EXCO Resources
EXCO? Excellent!
Tuesday was a banner day for shareholders of nat-gas driller EXCO Resources, which gained more than 9% as the rest of the market bled red. For this, you can thank the friendly analysts at KeyBanc, who upgraded the stock to "buy."
As StreetInsider.com explains, KeyBanc thinks EXCO is about to benefit from any number of "potential transactions that are on the cusp of being consummated." There's the sale of TGGT for one thing, and multiple joint venture agreements for development of conventional gas assets with "a number of interested parties" for another. Based on the assumption that one or more of these deals will go through soon, KeyBanc has quadrupled its predicted profit for EXCO this year to $0.16 per share and now believes the company will be profitable next year as well. (The consensus on Wall Street is still predicting losses both this year and next.)
Yet optimistic as KeyBanc is, even this analyst admits the most we can hope EXCO will earn over this year and next is a total of $0.20 per share -- about a dime a year. That works out to a P/E ratio of roughly 79 -- pretty pricey even for a profitable stock. (And remember, KeyBanc is the outlier here. Most analysts still doubt that EXCO will earn a profit.) Add in the fact that this company hasn't generated a dime's worth of free cash flow since 2003, and I just can't agree with KeyBanc on this one. EXCO's no "buy." In fact, it might even be a "sell."
More dirt for Clean Energy
And speaking of stocks that should be sold, Clean Energy is back atop news feeds in the wake of a rather disappointing Q1 earnings report. On one hand, CE beat earnings estimates (by a whole penny! Hooray?). It's the other hand, however, that's hiding disappointment: revenues that, while up 13%, missed analyst estimates by a mile.
The news prompted analysts at Northland Securities to slice 13% off the company's target price -- but even this action seems too little, too late. Northland says the stock should perform about as well as the market from here on out. But here's the thing: Northland only cut its price target to $20 a share. Thanks to CE's post-earnings sell-off, the shares now sell for $16!
Sure, Northland could still be right about this. Clean Energy could gain 25%, and return to $20 within a year, and this performance could match the market's return. (Of course, if that were true, I'd rather buy into a 25% run-up on the Dow in general than Clean Energy in particular. Dow 16,000, anyone?) As for buying Clean Energy, though, the company has 9 times more operating cash outflows than it reported in 2010, and its capex has doubled, resulting in trailing cash burn of more than $150 million. Doesn't sound like much of a buy thesis to me.
Prognosis still good for Affymax
Finally, let's turn to our featured "downgrade." Reviewing the Q1 earnings report that Affymax released yesterday, analysts at WBB Securities decided to ratchet down the company's rating one notch, from "strong buy" to merely "buy." But is this a distinction that makes a difference?
I don't think so. Affymax reported a strong earnings quarter in Q1 ($0.87 per share, diluted), but the company's still unprofitable on a trailing-12-month basis and burning cash at a rate upwards of $70 million a year. Wall Street believes the company will eventually earn a profit, but not before 2015 at the earliest -- and even then, profitability will depend on a roughly fivefold increase in sales to achieve.
Whether WBB sees in these numbers a reason to "buy" the stock, or to "strongly" buy it, either way, the analyst is engaging in pure speculation. The only certain prediction I'd be willing to make is that, with funds in its bank account barely sufficient to cover a year's worth of cash burn, and no free cash flow likely any time soon, Affymax will need to issue more shares to raise cash -- and with the stock now near a 52-week high, it should probably do so sooner rather than later.
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Whose advice should you take -- Rich's, or that of "professional" analysts like KeyBanc, Northland, and WBB Securities? Check out Rich's track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.
