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'll begin with a couple of new ratings in the sunburned solar sector, as Trina Solar
Burnt by the sun
With shares down 75% and 74%, respectively, over the past year, you might think investors would take an equally dim view of the prospects at Trina Solar and Suntech. You'd be wrong, as demonstrated by divergent ratings moves this morning at Maxim Group.
Pointing to the devastated share price as evidence that "risk/reward" has become "more balanced" at Trina Solar, Maxim argues that Trina has better assets, and better chances of surviving the solar slowdown, than many of its peers. As such, the analyst is prepared to cut Trina some slack and removed its "sell" rating on the stock this morning.
Not so with Suntech. Blasting the company for its still-growing losses and debt, Maxim took a look at its old $1.50 target price on the sell-rated stock and decided it was ... too optimistic. Seeing "steep 1Q downside" in the stock, which is trying (and failing) to eke out a profit on 5% gross margins, Maxim cut its target price by two-thirds and now says the most investors can hope for is that Suntech will be worth $0.50 a year from now.
That's a pretty harsh judgment on a stock that currently costs nearly four times that price, but it may be justified. Consider: Suntech already owes its creditors roughly $2 billion in net debt, versus a market cap of less than $350 million. But rather than paying that debt down, the company's $45 million cash-burn rate suggests it may have to pile on even more debt as time goes on. Unless something changes here, and soon, Suntech may not even fetch the four bits Maxim is predicting. This stock really could go to zero.
OCZ spells "buy?"
And speaking of stocks that could go to zero: OCZ Technology. The name sort of rhymes, but that's about the kindest thing I can say about this one, which somehow wheedled an "outperform" rating out of Credit Suisse this morning.
No one's quite sure what it is that Credit Suisse sees in OCZ. (The rating has been published, but not even the ratings-watchers at StreetInsider.com know the details.) All we really know right now is that CS thinks OCZ, currently priced at $5 and change, is worth $8. But how likely is that proposed 60% profit to materialize?
I mean, OCZ just finished reporting earnings earlier this month. Revenue ran up 70% versus last year's fiscal Q4, yet even so, OCZ managed to lose more money this time around -- $0.11 per share. So I ask you, if the more OCZ sells, the more money it loses, what's the solution here? What takes the stock to $8? Answer: nothing. Unless OCZ finds a way to earn a profit from its business, the stock remains a dog, with fleas. I'm so certain of this, in fact, that I'm publicly doubling down on my previous underperform rating on OCZ and recommending again in my CAPS account that it be sold. (Want to watch? It's happening right now.)
So what does "RFMD" spell?
Given my aversion to cash-burning enterprises, you might expect I'd have similar words to say about investment banker Stephens' decision to recommend buying shares of RF Micro Devices this morning. And yes, on one hand, the stock does look like a pretty good candidate for sale. The company barely broke even over the past 12 months, netting all of just $900,000 profit from its $871 million in sales.
But here's the thing: While RF Micro has struggled to produce GAAP profits lately and is actually GAAP unprofitable over the past five years, it's nonetheless racked up an impressive amount of cash profit in its bank account. Cash-flow statements for the company show that RF Micro has succeeded in generating annual free cash flow of about $88 million, on average. And when you compare this cash haul with the company's enterprise value (currently under $850 million), the resulting EV/FCF ratio of less than 10 looks pretty attractive relative to RF Micro's projected long-term 13% growth rate.
Long story short, while I'm willing to go virtually "short" on OCZ, RF Micro can keep its place in my CAPS portfolio a while longer. No, it's not the very best semiconductor company out there. In fact, our analysts at the Fool think much more highly of another company with its crosshairs set directly on the trillion-dollar revolution in mobile devices. To find out which company it is, pick up our free report today.
Whose advice should you take -- Rich's, or that of "professional" analysts such as Maxim Group, Credit Suisse, and Stephens? Check out Rich's track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.
Fool contributor Rich Smith owns no shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on more than 60 separate companies. Check them out on Motley Fool CAPS, where he goes by the handle TMFDitty -- and is currently ranked No. 315 out of more than 180,000 CAPS members. The Motley Fool has a disclosure policy.
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