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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, 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 be looking at how Cypress Semiconductor (NYSE: CY) escaped a "sell" rating, find out why U.S. Steel (NYSE: X) got upgraded to "outperform," and on the bad-news front, take a quick look at Cree's (Nasdaq: CREE) latest downgrade. Let's dive right in.
Outlook down, but ratings up?
We begin with Cypress Semi, which last week disappointed investors with third-quarter guidance that fell below expectations. Q3 revenue, says the company, will be basically flat, with earnings of no more than $0.21 versus Street expectations of $0.26 -- and only pro forma earnings at that.
Scary? Apparently so, and the shares are down 7.5% since earnings as a result. But now that the bad news is priced in, Cantor Fitzgerald thinks it's time to jump back into the stock: "We are upgrading the shares of Cypress to Hold as the shares reached our [expected decline]. We believe that the downside is probably limited from here and that there is the potential that 4Q:12 will be better than we currently project."
It had better be, because if all Cypress can manage is more of the same -- earnings that now have the stock trading at a nosebleed 32 P/E -- then this stock could be headed for some rough times. Most analysts think Cypress will be stuck around 12% annual growth levels for the foreseeable future, which is far too low to support a valuation this high. If they're right, and Cantor is wrong... look out below.
U.S.A.! U.S.A! But U.S. Steel...?
This morning the analysts at Imperial Capital slapped an "outperform" rating on U.S. Steel. But someone call a doctor, please, because it's hard to imagine a stock that might be more hazardous to your wealth.
Unprofitable and burning cash, U.S. Steel labors under the burden of high pension costs and a $4.1 billion debt load (against just $650 million in cash). Earnings are expected to rebound next year, granted -- but we've heard that song before. Meanwhile, it's been four years since the company last generated actual profits from its business. Want to bet that Imperial Capital is right, and the next time this company manages to earn a profit is in the middle of a global economic downturn?
I thought not. U.S. Steel is still a sucker's bet. If you want to bet on a rebound in steel, at least focus on the two companies in this industry that have proven their ability to generate cash even in tough economic times: Steel Dynamics (Nasdaq: STLD) and Nucor (NYSE: NUE).
Cree: Not all it's cracked up to be
And finally -- and with apologies for ending on a down note -- we come to Cree. Investors are waiting with bated breath to see if Cree can pull off an upset in its Q4 report, due out next month. But according to StreetInsider.com, not everyone's feeling confident. The website reports that this morning, Needham & Co. is hedging its "buy" bet on Cree with a significant walkback in earnings expectations:
We expect results to largely match Street's estimate based on strong demand in the quarter. However, we are cutting our forward estimate based on a more conservative view on LED lighting adoption and our anticipation for weaker pricing. Longer-term, we remain positive for Cree as we continue to believe it is well-positioned in LED adoption in general lighting.
So, let me get this straight. Earnings will be fine next month, but forward estimates need to be cut, and this is the reason for "longer-term" optimism? That sounds a bit backward, and unnecessarily complex -- so let's make this real simple:
Cree costs 47 times earnings based on what it's done so far. It pays no dividend, and Needham's needless waffling notwithstanding, most analysts on the Street don't expect Cree to grow its earnings much faster than 15% per year over the next five years. That should be all the numbers you need to build a bear case against Cree for both the short and the long term. (But don't fret. If Cree doesn't make the grade you can always just buy The Only Stock You Need To Profit From the NEW Technology Revolution.)
Whose advice should you take -- mine, or that of "professional" analysts like Cantor Fitzgerald, Imperial, and Needham? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
